-----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, DsFmc/bi+0aRFx3KNd0OEu0fgpkM0wrX+P8mPdTc9jwaR+R0sG+hgaQypJtdRcuc Yya00DLGQ+TUO2kLN61Fqw== 0000950124-08-001645.txt : 20080331 0000950124-08-001645.hdr.sgml : 20080331 20080331144724 ACCESSION NUMBER: 0000950124-08-001645 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080331 DATE AS OF CHANGE: 20080331 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-00737 FILM NUMBER: 08723753 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-K 1 k25331e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 Commission file number 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) Registrant's telephone number (231) 627-7111 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $2.50 PER SHARE (Title of Class) Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act Yes No X ----- ----- Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X ----- ----- 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large Non- Smaller accelerated Accelerated accelerated reporting filer [ ] filer [ ] filer [ ] company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes No X ----- ----- Aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2007 was $ 49,579,880. As of March 20, 2008 there were outstanding 1,214,419 shares of the registrant's common stock, $2.50 par value. DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the registrant's annual report to security holders for fiscal year ended December 31, 2007 are incorporated by reference in Part I and Part II of this report, and specified portions of the registrant's proxy statement for its annual meeting of shareholders to be held May 20, 2008 are incorporated by reference in Part III of this report. 1 PART I 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. ITEM 1-BUSINESS CNB Corporation (the Company) was incorporated in June, 1985 as a business corporation under the Michigan Business Corporation Act, pursuant to the authorization and direction of the Board of Directors of the Citizens National Bank of Cheboygan (the Bank). The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act with the Bank as its wholly-owned subsidiary. The Bank was acquired by the Company effective December 31, 1985. The Company has corporate power to engage in such activities as permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve Board. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or such other activities which are closely related to the business of banking. During 2001, the Company, through its subsidiary, the Bank, formed the CNB Mortgage Corporation. Residential mortgages were transferred to the new subsidiary in October, 2001. The change had no impact on our customers who continue to have their loans serviced locally by our Bank. 2 The Bank offers a full range of banking services to individuals, partnerships, corporations, and other entities. Banking services include checking, NOW accounts, savings, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. The Bank's lending function provides a full range of loan products. These include real estate mortgages, secured and unsecured commercial and consumer loans, lines of credit, home equity loans and construction financing. The Bank also participates in specialty loan programs through the Michigan State Housing Development Authority, Federal Home Loan Mortgage Corporation, Mortgage Guaranty Insurance Corporation, Farm Service Agency and Small Business Administration. Through correspondent relationships, the Bank also makes available credit cards and student loans. The Bank's loan portfolio consists of over 48% residential real estate mortgages on both primary and secondary homes. The residential borrower base is very diverse and loan to value ratios are generally 80% or less. The Bank does not practice subprime lending and does not have any loans that it would consider to be subprime mortgage loans. Commercial loans accounts for approximately 47% of total loans. Commercial real estate lending, a part of commercial loans, has grown to represent 40% of total loans. These loans are generally for owner occupied properties with loan to value ratios of 80% or less. Personal guarantees are required on most commercial loans. Unsecured lending is very limited. The Bank makes first and second mortgage loans to its customers for the purchase of residential and commercial properties. Historically, the Bank has sold its long term fixed rate residential mortgage loans qualifying for the secondary market to the Federal Home Loan Mortgage Corporation (FHLMC). The mortgage loan portfolio serviced by the Bank for the FHLMC totaled approximately $75 million at December 31, 2007. Banking services are delivered through seven full-service banking offices and two drive-in branches plus eleven automated teller machines in Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the counties is primarily tourism with light manufacturing. The Bank maintains correspondent bank relationships with several larger banks, which involve check clearing operations, transfer of funds, loan participations, and the purchase and sale of federal funds and other similar services. We opened our new branch facility just south of Alanson in Littlefield Township in January 2007. This is our first expansion location since the Indian River branch opened in 1981. The new Alanson branch includes a full lobby service, easily accessible drive-thru lanes and a drive up ATM. Under various agency relationships, the Bank provides trust and discount brokerage services and mutual fund, annuity and life insurance products to its customers. In its primary market, which includes Cheboygan County and parts of Emmet, Mackinac and Presque Isle Counties, the Bank is one of three principal banking institutions. One is a member of a multi-bank holding company with substantially more assets than the Company, while the other is an independent community bank. There are also two credit unions, one savings and loan association and a brokerage firm. As of December 31, 2007, the Bank employed 80 full-time and 8 part-time employees. This compares to 75 full-time and 12 part-time employees as of December 31, 2006. Neither the Company nor CNB Mortgage Corporation has any full-time employees. Their operation and business are carried out by officers and employees of the Bank who are not compensated by the Company. Disclosure relating to the Distribution of Assets, Liabilities and Stockholders'Equity; Interest rates and Interest differential is presented on pages 43-44 of Registrant's 2007 Annual Report which is incorporated herein by reference. 3 SECURITIES The year end fair values and related gross unrealized gains and losses for securities available for sale, were as follows: AVAILABLE FOR SALE
Gross Gross Fair Unrealized Unrealized Available for Sale Value Gains Losses - ------------------ ------- ---------- ---------- (In thousands) 2007 U.S. Government and agency $12,304 $111 $ (1) Mortgage-backed 10,238 39 (31) State and municipal 3,951 31 (2) Money market preferred stock 14,000 -- -- ------- ---- ----- $40,493 $181 $ (34) ======= ==== ===== 2006 U.S. Government and agency $21,307 $ 8 $(125) Mortgage-backed 10,491 4 (107) State and municipal 8,549 59 (13) Money market preferred stock 10,984 -- (16) ------- ---- ----- $51,331 $ 71 $(261) ------- ---- -----
The year end carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows: HELD TO MATURITY
Gross Gross Carrying Unrecognized Unrecognized Fair Held to Maturity Amount Gains Losses Value - ---------------- -------- ------------ ------------ ------ (In thousands) 2007 State and municipal $8,789 $118 $(25) $8,882 ====== ==== ==== ====== 2006 State and municipal $4,543 $ 54 $(15) $4,582 ====== ==== ==== ======
4 Scheduled maturities of the fair value of securities available for sale and the carrying amount of held to maturity securities at December 31, 2007, were as follows:
Due in Due from Due from Due One year One to Five to After ten Or less Five years Ten years Years Total -------- ---------- --------- --------- ------- (In thousands) U.S. Government and agency $ 5,545 $ 6,759 $ -- $ -- $12,304 Mortgage-backed 864 9,374 -- -- 10,238 State and municipial 4,104 3,825 3,301 1,510 12,740 Money market prefd stock 14,000 -- -- -- 14,000 ------- ------- ------ ------ ------- $24,513 $19,958 $3,301 $1,510 $49,282 ======= ======= ====== ====== ======= Yield 5.39% 5.18% 6.64% 6.80% 5.43% ======= ======= ====== ====== =======
The Company held securities exceeding 10% of shareholders' equity for the following states (including its political subdivisions) at December 31, 2007:
Book Fair Value Value ------ ------ (In thousands) Michigan $9,392 $9,437
LOANS The following is a summary of loans at December 31:
2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- (In thousands) Residential real estate $ 83,264 $ 82,842 $ 83,234 $ 83,364 $ 89,042 Consumer 8,709 9,444 9,922 8,699 9,660 Commercial real estate 68,445 61,740 53,133 43,336 35,258 Commercial 14,234 13,208 10,037 9,220 9,540 -------- -------- -------- -------- -------- 174,652 167,234 156,326 144,619 143,500 Deferred loan origination fees, net (28) (6) (8) (11) (15) Allowance for loan losses (1,670) (1,498) (1,456) (1,350) (1,575) -------- -------- -------- -------- -------- $172,954 $165,730 $154,862 $143,258 $141,910 ======== ======== ======== ======== ========
5 Maturity and Rate Sensitivity of Selected Loans The following table presents the remaining maturity of total loans outstanding excluding residential real estate and consumer loans at December 31, 2007, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity of changes in interest rates.
Total -------------- (In thousands) In one year or less $38,861 After one year but within five years: Interest rates are floating or adjustable -- Interest rates are fixed or predetermined 39,711 After five years: Interest rates are floating or adjustable -- Interest rates are fixed or predetermined 4,107 ------- $82,679 =======
Summary of loan loss experience is as follows: Additional information relative to the allowance for loan losses is presented in the following table. This table summarizes loan balances at the end of each period and daily average balances, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance for loan losses through provisions charged to expense.
2007 2006 2005 2004 2003 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of period $1,498 $1,456 $1,350 $1,575 $1,669 Less charge-offs: Residential real estate 57 2 -- 33 8 Consumer 59 63 28 43 98 Commercial real estate -- -- -- -- -- Commercial 10 39 -- 166 -- ------ ------ ------ ------ ------ Total charge-offs: 126 104 28 242 106 Recoveries: Residential real estate 5 6 7 1 1 Consumer 16 19 7 8 11 Commercial real estate -- -- -- -- -- Commercial 2 1 -- 8 -- ------ ------ ------ ------ ------ Total recoveries 23 26 14 17 12 ------ ------ ------ ------ ------ Net charge-offs 103 78 14 225 94 ------ ------ ------ ------ ------ Provision charged to expense 275 120 120 -- -- ------ ------ ------ ------ ------ Allowance for loan losses, end of period $1,670 $1,498 $1,456 $1,350 $1,575 ====== ====== ====== ====== ======
6
2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- (Dollars in thousands) Total loans outstanding at end of period $174,652 $167,234 $156,326 $144,619 $143,500 Average loans outstanding for the year $172,144 $163,146 $149,681 $143,800 $146,330 Ratio of net charge-offs to daily average loans outstanding 0.06% 0.05% 0.01% 0.16% 0.06% Ratio of net charge-offs to total loans outstanding 0.06% 0.05% 0.01% 0.16% 0.07%
The allocation of the allowance for loan losses for the years ended December 31 is:
Residential Commercial Real Estate Consumer Real Estate Commercial Unallocated Total ----------- -------- ----------- ---------- ----------- ------ (Dollars in thousands) 2007 Allowance amount $ 446 $ 97 $ 814 $268 $ 45 $1,670 % of Total loans 47.7% 5.0% 39.2% 8.1% 100.0% 2006 Allowance amount $ 437 $ 98 $ 655 $228 $ 80 $1,498 % of Total loans 49.5% 5.7% 36.9% 7.9% 100.0% 2005 Allowance amount $ 299 $ 35 $ 829 $163 $ 130 $1,456 % of Total loans 53.2% 6.3% 34.0% 6.5% 100.0% 2004 Allowance amount $ 223 $ 39 $ 118 $ 74 $ 896 $1,350 % of Total loans 57.6% 6.0% 30.0% 6.4% 100.0% 2003 Allowance amount $ 258 $ 48 $ 88 $ 49 $1,132 $1,575 % of Total loans 62.1% 6.7% 24.6% 6.6% 100.0%
The amount of the unallocated allowance decreased significantly from $896,000 in 2004 to $130,000 in 2005. This was primarily due to a revision of the allowance for loan losses methodology during 2005. During 2005 management enhanced their assessment of inherent risks in the loan portfolio which resulted in increased allowance allocations in the commercial real estate and commercial loan categories during 2005. Management feels the new methodology better allocates the allowance into the appropriate loan categories. The review of the loan portfolio revealed no undue concentrations of credit, however, the portfolio continues to be concentrated in residential real estate mortgages and highly dependent upon the tourist industry for the source of repayment. Because the reliance on tourism is both primary, (i.e. loans to motels, hotels, and restaurants, etc.) and secondary (i.e. loans to employees of tourist related businesses), it is difficult to assess a specific dollar amount of inherent loss potential. Likewise, the residential real estate market has been stable or increasing, so inherent loss potential in this concentration is also difficult to reasonably assess. Therefore, the tourism industry and residential real estate mortgage concentrations are considered in establishing the allowance for loan loss. 7 The following is a summary of nonaccrual, past due and restructured loans as of December 31:
2007 2006 2005 2004 2003 ------ ---- ---- ---- ----- (In thousands) Nonaccrual loans $ 831 $ -- $ -- $ -- $ -- Loans past due 90 days or more 387 177 255 674 408 Troubled debt restructurings -- -- -- -- -- ------ ---- ---- ---- ---- $1,218 $177 $255 $674 $408 ====== ==== ==== ==== ====
DEPOSITS The following table presents the remaining maturity of time deposits individually exceeding $100,000 at December 31, 2007. Dollars are reported in thousands. 3 Months or less $ 5,926 Over 3 Months to 6 Months 3,451 Over 7 Months through 12 Months 5,457 Over 12 Months 10,669 ------- $25,503 =======
Various ratios required by this section and other ratios commonly used in analyzing bank holding company financial statements are included in page 1 of Registrant's 2007 Annual Report, which is incorporated herein by reference. SUPERVISION AND REGULATION As a bank holding company within the meaning of the Bank Holding Company Act, the Company is required to file quarterly and annual reports of its operations and such additional information as the Federal Reserve Board may require and is subject, along with its subsidiary, to examination by the Federal Reserve Board. The Federal Reserve Board is the primary regulator of the Company. The Bank Holding Company Act requires every bank holding company to obtain prior approval of the Federal Reserve Board before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank, or acquire ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank holding company or bank. The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. However, holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve Board to be so closely related to banking or the management or control of banks as to be a proper incident thereto. Under current regulations of the Federal Reserve Board, a holding company and its nonbank subsidiaries are permitted, among other activities, to engage, subject to certain specified limitations, in such banking related business as consumer finance, equipment leasing, computer service bureau and software operations, data processing, discount securities brokerage, mortgage banking and brokerage, sale and leaseback, and other forms of real estate banking. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. 8 In addition, Federal legislation prohibits acquisition of "control" of a bank or bank holding company without prior notice to certain federal bank regulators. "Control" in certain cases may include the acquisition of as little as 10% of the outstanding shares of capital stock. The Company's cash revenues are derived primarily from dividends paid by the Bank. Without prior approval, a national bank may not declare a dividend if the total amount of all dividends declared by the bank in any calendar year exceeds the total bank's retained net income for the current year and retained net income for the preceding two years. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be "undercapitalized." The Bank is a national banking association and as such is subject to the regulations of, and supervision and regular examination by, the Office of the Comptroller of the Currency ("OCC"). Deposit accounts of the bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Requirements and restrictions under the laws of the State of Michigan and Title 12 of the United States Code include the requirements that banks maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by a bank, and the interest that may be charged thereon, restrictions on the payment of interest on certain deposits, and restrictions relating to investments and other activities of a bank. The Federal Reserve Board has established guidelines for risk based capital by bank holding companies. These guidelines establish a risk adjusted ratio relating capital to risk-weighted assets and off-balance sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance sheet items in the calculation of capital requirements. An analysis of the Bank's regulatory capital requirements at December 31, 2007 is presented on page 29 of the Registrant's 2007 Annual Report in Note 14 Regulatory Capital to the Company's consolidated financial statements, which is incorporated herein by reference. ITEM 1A-RISK FACTORS In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors: WE FACE INTENSE COMPETITION IN ALL PHASES OF OUR BUSINESS FROM OTHER BANKS AND FINANCIAL INSTITUTIONS. We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. We compete for deposits, loans and other financial services with numerous Michigan-based and out-of-state banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services. Some of these competitors are not subject to the same regulatory restrictions, have advantages of scale due to their size, or have cost advantages due to their tax status. INTEREST RATES AND OTHER CONDITIONS IMPACT OUR RESULTS OF OPERATIONS. Our profitability is in part a function of the spread between the interest rates earned on loans and investments and the interest rates paid on deposits. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influences market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities (deposits) will be such that they are affected differently by a given change in interest rates. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates, changes in the U.S. Treasury yield curve and other similar factors may have an adverse effect our business, financial condition and results of operations. 9 OUR LOCAL ECONOMY MAY AFFECT OUR FUTURE GROWTH POSSIBILITIES. Our current market area is principally located in Northern Michigan. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand our market area and market share. A downturn in our local economy may limit funds available for deposit and may negatively affect our borrowers' ability to repay their loans on a timely basis, both of which could have an impact on our profitability. WE RELY HEAVILY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF ANY OF THEM MAY ADVERSELY EFFECT OUR OPERATIONS. We are and will continue to be dependent upon the services of our management team, including our President and Chief Executive Officer, our Senior Vice President, and our other senior managers and commercial lenders. Losing one or more key members of the management team could adversely affect our operations. WE MUST EFFECTIVELY MANAGE OUR CREDIT RISK. These are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risk of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures. We have a formal lending policy that is approved by the Board of Directors of the Bank. However prudent these procedures may be they do not eliminate credit risk. OUR CREDIT LOSSES COULD INCREASE AND OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN LOSSES. The risk of nonpayment of loans is inherent in all lending activities and nonpayment, if it occurs, may have a material adverse affect on our earnings and overall financial condition as well as the value of our common stock. We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions were wrong, our allowance for loan losses may not be sufficient to cover our losses, thereby having an adverse affect on our operating results, and may cause us to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for credit losses. These regulatory agencies may require us to increase our provision for credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for credit losses could have a negative effect on our net income, financial condition and results of operations. THE COMPANY CONTINUES TO BE SUBJECT TO INCREASED REGULATORY REQUIREMENTS IMPOSED BY THE SARBANES-OXLEY ACT OF 2002, INCLUDING A REQUIREMENT THAT MANAGEMENT ATTEST TO THE COMPANY'S INTERNAL CONTROLS OVER FINANCIAL REPORTING, WHICH ATTESTATION WILL BE REVIEWED BY THE COMPANY'S EXTERNAL AUDITORS. THESE REQUIREMENTS REPRESENT INCREASED COSTS TO THE COMPANY OVER PAST PERIODS. The Company is required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002 as well as new rules and regulations adopted by the Commission and the Public Company Accounting Oversight Board. In particular, unless extended, the Company will be required to include external auditor reports on the effectiveness of internal controls over financial reporting as part of its annual report on Form 10-K for the year ended December 31, 2008, pursuant to Section 404 of the Sarbanes-Oxley Act. Management is already required to report on the effectiveness of internal controls for the year ended December 31, 2007. The Company expects to continue to spend significant amounts of time and money on compliance with these rules. 10 WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE, AND WE MAY HAVE FEWER RESOURCES THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS. The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In additional to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT, AND CHANGES IN LAWS AND REGULATIONS TO WHICH WE ARE SUBJECT MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, Securities and Exchange Commission, and the Comptroller of the Currency. Regulations adopted by these agencies govern a comprehensive range of matters relating to our permissible activities for us to engage in, maintenance of adequate capital levels, matters of internal control over financial reporting and other aspects of our operations. The regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law or regulation. The laws and regulations applicable to the Company could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability. For example, new legislation or regulation may limit the manner in which we may conduct our business, including our ability to offer new products, attract deposits, make loans and achieve satisfactory spreads. THERE IS A LIMITED TRADING MARKET FOR OUR COMMON SHARES, AND THUS YOUR ABILITY TO SELL OR PURCHASE OUR COMMON SHARES MAY BE LIMITED. Your ability to sell our common shares or purchase additional common shares largely depends upon the existence or an active market for our common shares. Although our common shares are quoted on the OTC Bulletin Board, they are not listed on any securities exchange and the volume of trading has been historically limited. As a result, you may not be able to sell or purchase our common shares at the volume, time and price that you desire. In addition, a fair valuation of the purchases or sales price of our common shares also depends upon an active trading market, and thus the price you receive for a thinly traded stock, such as our common shares, may not reflect its true value. WE MAY NOT BE ABLE TO PAY DIVIDENDS IN THE FUTURE IN ACCORDANCE WITH PAST PRACTICE. We pay a quarterly dividend to shareholders. However, we are dependent primarily upon the Bank for our earnings and funds to pay dividends on our common stock. The payment of dividends also is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Bank's earnings, capital requirements, financial condition and other factors considered by our Board of Directors. ITEM 1B-UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2-PROPERTIES The Company and the Bank have their primary office at 303 North Main Street, Cheboygan, Michigan. In addition, the Bank owns and operates the following facilities: Cheboygan South, 10854 North Straits Highway; Onaway Office, 20581 W. State Street, Onaway; Mackinaw City Office, 580 S. Nicolet Street, Mackinaw City; Pellston Office, 200 Stimpson, Pellston; Indian River Office, 3990 Straits Highway, Indian River; Downtown drive-in, 414 Division Street, Cheboygan; 11 and East Side drive-in, 816 East State Street, Cheboygan. During 2006 the Bank constructed a new facility in Littlefield Township just south of Alanson, Emmet County. The new facility was opened in January 2007 and is located at 8011 S. US 31, Alanson. All properties are owned by the Bank free of any mortgages or encumbrances but for the Littlefield Township property upon which there is a purchase money mortgage which was entered into to accommodate the seller. ITEM 3-LEGAL PROCEEDINGS Neither the Company nor the Bank is a party to any pending legal proceedings other than the routine litigation that is incidental to the business of banking. ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There have been no matters submitted to a vote of security holders during the fourth quarter of 2007. PART II ITEM 5-MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is listed on the Over-the-counter Bulletin Board under the symbol "CNBZ". All trades are handled on a direct basis between buyer and seller. The Bank acts as the Company's transfer agent. The principal market for the Company's stock consists of existing shareholders, family members of existing shareholders and individuals in the service area. The information detailing the range of high and low selling prices of known transactions for the Company's common stock and cash dividends declared for each full quarterly period within the two most recent fiscal years can be found under the caption "Financial Highlights" on page 1 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2007, which is hereby incorporated by reference. The information which indicates the amount of common stock that is subject to outstanding options or warrants to purchase, or securities convertible into, common equity of the registrant can be found in Note 8 on page 23 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2007, which is hereby incorporated by reference. There are approximately 1,017 shareholders of record of common stock of the Company as of January 31, 2008. During 2007 and 2006, the Company declared regular dividends of $1.68 per share plus a special dividend of $0.60 per share. The information detailing the cash dividends declared within the two most recent fiscal years can be found under the caption "Financial Highlights" on page 1 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2007, which is hereby incorporated by reference. These have resulted in a dividend payout ratio averaging 86.1% for the past three years. The Federal Reserve Board's policy of Cash Dividends by Bank Holding Companies restricts the payment of cash dividends based on the following criteria: (1) the Company's net income from operations over the past year must be sufficient to fully fund the dividend and (2) the prospective rate of earnings retention must be consistent with the Company's capital needs, asset quality and overall financial condition. 12 ITEM 6-SELECTED FINANCIAL DATA The information required by this item is included on Page 1 under the caption "Financial Highlights" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2007, which is hereby incorporated by reference. ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included on pages 35 through 47 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2007, which is hereby incorporated by reference. ITEM 7A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included on pages 40 through 41 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2007, which is hereby incorporated by reference. ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is included on pages 2 through 32 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2007, which is hereby incorporated by reference. ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In February 2007, the Company announced that the Board of Directors, upon recommendation of its Audit Committee, dismissed Crowe Chizek and Company LLC the Company's independent auditors, and engaged Plante & Moran, PLLC to serve as the Company's independent auditors for the fiscal year ending December 31, 2007. For more information, see the Company's current report on Form 8-K/A, filed with the SEC on March 1, 2007. ITEM 9A (T) -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, 2007. 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 13 assessment we believe that, as of December 31, 2007, 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, 2007 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. ITEM 9B-OTHER INFORMATION None. PART III ITEM 10-DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Certain information required by this item is included under the captions "Information about Director Nominees," "Committees and Meetings of the Board of Directors," "Code of Ethics," and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 20, 2008, which is hereby incorporated by reference. Information about the executive officers of the Corporation is set forth below.
Name and Age Position - ------------ -------- Vincent J. Hillesheim, 57 Chairman of the Corporation and Citizens National Bank of Cheboygan. Mr. Hillesheim was elected Chairman in 2006.
14 Susan A. Eno, 53 Chief Executive Officer and President of the Corporation and Citizens National Bank of Cheboygan. Ms. Eno has been an officer of the Corporation since 1996 and an employee of the Bank since 1971. She has been in her current position since January 1, 2008 and was in her previous position as Executive Vice President and Secretary of the Corporation and Executive Vice President and Cashier of Citizens National Bank of Cheboygan for more than 11 years. Douglas W. Damm, 54 Senior Vice President of the Corporation and Citizens National Bank of Cheboygan. Mr. Damm has been an officer of the Corporation since 2003 and an employee of the Bank since 1987. He has been in his current position for more than 20 years and has 29 years experience in the banking business. Shanna L. Hanley, 30 Treasurer of the Corporation; Vice President and Senior Controller of Citizens National Bank of Cheboygan. Ms. Hanley joined the Bank during 2005.
ITEM 11-EXECUTIVE COMPENSATION The information required by this item is included under the caption "Compensation Discussion and Analysis" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 20, 2008, which is hereby incorporated by reference. ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is included under the caption "Ownership of Common Stock" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 20, 2008, which is hereby incorporated by reference. The information required by this item is included under the caption "Securities Authorized for Issuance Under Equity Compensation Plan Information" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 20, 2008, which is hereby incorporated by reference. ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is included under the caption "Certain Relationships and Related Transactions" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 20, 2008, which is hereby incorporated by reference. ITEM 14-PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is included under the caption "Independent Auditors" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 20, 2008, which is hereby incorporated by reference. PART IV ITEM 15-EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements. The following financial statements, notes to financial statements and independent 15 report of CNB Corporation and its subsidiary are referenced in Item 8 of this report and are hereby incorporated by reference: Consolidated Balance Sheets-December 31, 2007 and 2006. Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2007, 2006 and 2005. Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2007, 2006 and 2005. Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm dated March 28, 2008. (2) Financial Statement Schedules. Not applicable (3) Exhibits. (3a) Articles of Incorporation. Previously filed as exhibit to the registrant's Form 10-KSB filed April 26, 1996, and hereby incorporated by reference. (3b) By-Laws as amended through March 25, 2004. Previously filed as Exhibit 3b to the Company's Form 10-K for the fiscal year ended December 31, 2003 filed December 27, 2004, and hereby incorporated by reference. (10) 1996 Stock Option Plan. Previously filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended September 30, 1996 and hereby incorporated by reference. (11) Statement regarding computation of per share earnings. This information is disclosed in Note 10 to the Company's Financial Statements for the year ended December 31, 2007, which are included in the annual report to shareholders for the year ended December 31, 2007 which is filed as Exhibit 13 to the Company's Form 10-K for the fiscal year ended December 31, 2007, and hereby incorporated by reference. (13) Annual report to shareholders for the year ended December 31, 2007. (filed herewith). (21) Subsidiaries of the Company. (filed herewith). (23) Consent of Independent Registered Public Accounting Firm. (filed herewith). (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) See Item 15(a) (3) above. (c) Financial Statement Schedules. Not applicable. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 2008 /s/ Susan A. Eno - ---------------------------------------- Susan A. Eno President and Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 2008. /s/ Steven J. Baker /s/ Kathleen A. Lieder /s/ Douglas W. Damm - ------------------------------ ------------------------------ ------------------------------ Steven J. Baker Kathleen A. Lieder Douglas W. Damm Director Director Senior Vice President /s/ James C. Conboy, Jr. /s/ John L. Ormsbee /s/ Shanna L. Hanley - ------------------------------ ------------------------------ ------------------------------ James C. Conboy, Jr. John L. Ormsbee Shanna L. Hanley Director Director Treasurer (Principal Financial Officer) /s/ Kathleen M. Darrow /s/ R. Jeffery Swadling - ------------------------------ ------------------------------ Kathleen M. Darrow R. Jeffery Swadling Director Director /s/ Thomas J. Ellenberger /s/ Francis J. VanAntwerp, Jr. - ------------------------------ ------------------------------ Thomas J. Ellenberger Francis J. VanAntwerp, Jr. Director Director /s/ Vincent J. Hillesheim /s/ Susan A. Eno - ------------------------------ ------------------------------ Vincent J. Hillesheim Susan A. Eno Director Director (Bank Only) Chairman President and Chief Executive Officer
17 EXHIBIT INDEX (3a) Articles of Incorporation. Previously filed as an exhibit to the registrant's Form 10-KSB filed April 26, 1996 and hereby incorporated by reference. (3b) By-Laws as amended through March 25, 2004. Previously filed as Exhibit 3b to the Company's Form 10-K for the fiscal year ended December 31, 2003 filed December 27, 2004, and hereby incorporated by reference. (10) 1996 Stock Option Plan. Previously filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended September 30, 1996 and hereby incorporated by reference. (11) Statement regarding computation per share earnings. This information is disclosed in Note 10 to the Company's Financial Statements for the year ended December 31, 2007 contained in is annual report to shareholders for the year ended December 31, 2007. (filed herewith) (13) Annual report to shareholders for the year ended December 31, 2007. (filed herewith) (21) Subsidiaries of the Company. (filed herewith) (23) Consent of Independent Registered Public Accounting firm. (filed herewith) (31.1) Certification of Chief Executive Officer. (filed herewith) (31.2) Certification of Chief Financial Officer. (filed herewith) (32.1) Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (filed herewith) 18 EX-13 2 k25331exv13.txt ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 CNB CORPORATION ANNUAL REPORT December 31, 2007, 2006 and 2005 . . . CNB CORPORATION ANNUAL REPORT December 31, 2007, 2006 and 2005 CONTENTS FINANCIAL HIGHLIGHTS .................................................... 1 CONSOLIDATED BALANCE SHEETS ............................................. 2 CONSOLIDATED STATEMENTS OF INCOME ....................................... 3 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY .............. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS ................................... 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .............................. 6 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ................. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS .................................... 35 OFFICERS, COMMUNITY ADVISORS AND STAFF .................................. 48 DIRECTORS AND DIRECTORS EMERITI ......................................... 50
CNB CORPORATION FINANCIAL HIGHLIGHTS
2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- (In thousands, except per share data) OPERATING STATISTICS Interest income $ 16,180 $ 14,969 $ 13,356 $ 12,466 $ 13,282 Interest expense 5,858 4,672 3,132 2,764 3,380 Net interest income 10,322 10,297 10,224 9,702 9,902 Income before income taxes 4,170 4,649 4,528 4,131 5,385 Net income 3,088 3,323 3,288 2,955 3,885 Basic earnings per share 2.51 2.68 2.66 2.38 3.12 Diluted earnings per share 2.50 2.68 2.65 2.37 3.11 Return on average assets (ROA) 1.19% 1.31% 1.28% 1.14% 1.53% Return on average shareholders' equity (ROE) 12.18% 13.09% 13.23% 11.68% 15.14% BALANCE SHEET STATISTICS Securities $ 50,290 $ 56,882 $ 74,485 $ 88,951 $ 86,921 Total loans 174,652 167,234 156,326 144,619 143,500 Deposits 225,026 221,365 223,437 225,411 224,914 Total assets 255,193 251,900 252,731 254,094 254,406 CAPITAL STATISTICS Shareholders' equity $ 24,400 $ 24,998 $ 24,499 $ 24,156 $ 25,138 Book value per share 20.11 20.17 19.80 19.51 20.21 Cash dividends per share 2.28 2.28 2.20 2.20 2.10 Dividend payout ratio 90.50% 85.00% 82.79% 92.32% 67.16% Average equity to average total assets 9.79% 10.01% 9.66% 9.79% 10.13% CREDIT STATISTICS Net charge-offs to total loans 0.06% 0.05% 0.01% 0.16% 0.07% Nonperforming loans to total loans 0.70% 0.11% 0.16% 0.47% 0.28% Allowance for loan losses to total loans 0.96% 0.90% 0.93% 0.93% 1.10% Allowance for loan losses to nonperforming loans 1.37x 8.46x 5.72x 2.00x 3.86x
PRICE RANGE FOR COMMON STOCK The following table shows the high and low selling prices of known transactions in common stock of the Company for each quarter of 2007 and 2006. As of December 31, 2007, there is no established public trading market for the Company's common stock. Beginning in March 2007 the stock is now traded on the over-the-counter bulletin. The Company's trading symbol is CNBZ. The Company had 1,019 shareholders as of December 31, 2007.
2007 2006 --------------------------- --------------------------- Market Price Cash Market Price Cash --------------- Dividends --------------- Dividends Quarter High Low Declared High Low Declared - ------- ------ ------ --------- ------ ------ --------- 1st $48.00 $40.00 $0.42 $50.00 $47.00 $0.42 2nd 45.00 38.00 0.42 49.00 45.00 0.42 3rd 40.75 37.00 0.42 47.00 40.00 0.42 4th 41.00 34.00 1.02 48.00 36.50 1.02
1. CNB CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2007 and 2006
2007 2006 -------- -------- (In thousands, except share and per share data) ASSETS Cash and due from banks $ 8,844 $ 8,444 Federal funds sold 8,428 6,368 -------- -------- Total cash and cash equivalents 17,272 14,812 Securities available for sale 40,493 51,331 Securities held to maturity 8,789 4,543 Other securities 1,008 1,008 Loans held for sale 150 -- Loans, net of allowance for loan losses of $1,670 in 2007 and $1,498 in 2006 172,804 165,730 -------- -------- Total net loans 172,954 165,730 Premises and equipment, net 6,353 6,626 Other assets 8,324 7,850 -------- -------- Total assets $255,193 $251,900 ======== ======== LIABILITIES Deposits Noninterest-bearing $ 37,984 $ 39,620 Interest-bearing 187,042 181,745 -------- -------- Total deposits 225,026 221,365 Other liabilities 5,767 5,537 -------- -------- Total liabilities 230,793 226,902 SHAREHOLDERS' EQUITY Common stock - $2.50 par value; 2,000,000 shares authorized; 1,213,632 and 1,239,512 shares issued and outstanding in 2007 and 2006 3,034 3,099 Additional paid-in capital 19,509 20,482 Retained earnings 2,528 2,235 Accumulated other comprehensive loss, net of tax (671) (818) -------- -------- Total shareholders' equity 24,400 24,998 -------- -------- Total liabilities and shareholders' equity $255,193 $251,900 ======== ========
See accompanying notes to consolidated financial statements. 2. CNB CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2007, 2006 and 2005
2007 2006 2005 ------- ------- ------- (In thousands, except per share data) INTEREST INCOME Loans, including fees $12,977 $12,149 $10,460 Securities Taxable 2,054 1,861 2,073 Tax exempt 489 482 571 Other interest income 660 477 252 ------- ------- ------- Total interest income 16,180 14,969 13,356 INTEREST EXPENSE ON DEPOSITS 5,858 4,672 3,132 ------- ------- ------- NET INTEREST INCOME 10,322 10,297 10,224 Provision for loan losses 275 120 120 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,047 10,177 10,104 ------- ------- ------- NONINTEREST INCOME Service charges and fees 1,194 1,049 942 Net realized gains from sales of loans 154 166 256 Loan servicing fees, net of amortization 127 119 113 Gain on life insurance 39 -- 300 Gain on the sale of premises and equipment 12 521 -- Other income 178 171 205 ------- ------- ------- Total noninterest income 1,704 2,026 1,816 NONINTEREST EXPENSES Salaries and employee benefits 3,727 3,535 3,303 Deferred compensation 311 317 690 Pension 103 239 260 Hospitalization 567 591 545 Occupancy 1,152 1,053 913 Supplies 220 222 168 Legal and professional 396 329 457 Marketing 191 193 191 Other expenses 914 1,075 865 ------- ------- ------- Total noninterest expense 7,581 7,554 7,392 ------- ------- ------- INCOME BEFORE INCOME TAXES 4,170 4,649 4,528 Income tax expense 1,082 1,326 1,240 ------- ------- ------- NET INCOME 3,088 3,323 3,288 ======= ======= ======= Basic earnings per share $ 2.51 $ 2.68 $ 2.66 Diluted earnings per share 2.50 2.68 2.65
See accompanying notes to consolidated financial statements. 3. CNB CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Accumulated Other Comprehensive Additional Income (Loss), Total Outstanding Common Paid-In Retained Net Shareholders' Shares Stock Capital Earnings of Tax Equity ------------- ---------- ----------- ------------ ----------------- ------------- (Dollars in thousands, except per share data) Balance January 1, 2005 1,237,994 $ 3,095 $ 20,475 $ 1,010 $ (424) $ 24,156 Net income 3,288 3,288 Other comprehensive income (loss): Change in unrealized gains (losses) on available for sale securities, net of tax of $254 (492) (492) Change in minimum pension liability, net of tax of $162 315 315 ------------- Total comprehensive income 3,111 Cash dividends - $2.20 per share (2,722) (2,722) Shares issued under stock option plan 1,382 4 48 52 Purchase and retirement of common stock (1,958) (5) (93) (98) ------------- ---------- ----------- ------------ ----------------- ------------- Balance December 31, 2005 1,237,418 3,094 20,430 1,576 (601) 24,499 Adjustment to beginning retained earnings pursuant to SAB 108 159 159 ------------- ---------- ----------- ------------ ----------------- ------------- Adjusted balance January 1, 2006 1,237,418 3,094 20,430 1,735 (601) 24,658 Net income 3,323 3,323 Other comprehensive income: Change in unrealized gains (losses) on available for sale securities, net of tax of $246 475 475 ------------- Total comprehensive income 3,798 Cash dividends - $2.28 per share (2,823) (2,823) Adjustment to initially apply SFAS No. 158, net of tax of $357 (692) (692) Shares issued under stock option plan 2,194 5 57 62 Purchase and retirement of common stock (100) (5) (5) ------------- ---------- ----------- ------------ ----------------- ------------- Balance December 31, 2006 1,239,512 3,099 20,482 2,235 (818) 24,998 Net income 3,088 3,088 Other comprehensive income: Change in unrealized gains (losses) on available for sale securities, net of tax of $115 222 222 Defined benefit pension plan: Net gain/loss during the period, net of tax of $36 (70) (70) Transition adjustment recognized, net of tax of $3 (6) (6) Prior service costs recognized 1 1 ------------- Total comprehensive income 3,235 Cash dividends - $2.28 per share (2,795) (2,795) Purchase and retirement of common stock (25,880) (65) (973) (1,038) ------------- ---------- ----------- ------------ ----------------- ------------- Balance December 31, 2007 1,213,632 $ 3,034 $ 19,509 $ 2,528 $ (671) $ 24,400 ============= ========== =========== ============ ================= =============
See accompanying notes to consolidated financial statements. 4. CNB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2007, 2006 and 2005
2007 2006 2005 -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 3,088 $ 3,323 $ 3,288 Adjustments to reconcile net income to net cash from operating activities Depreciation, amortization and accretion, net 119 320 458 Provision for loan losses 275 120 120 Loans originated for sale (9,114) (7,369) (11,613) Proceeds from sales of loans originated for sale 9,012 7,441 11,739 Gain on sales of loans (154) (166) (256) (Gain)loss on premises and equipment 12 (521) -- (Increase) decrease in other assets 162 (1,643) (596) Increase in other liabilities 137 878 732 -------- -------- -------- Total adjustments 449 (940) 584 -------- -------- -------- Net cash provided by operating activities 3,537 2,383 3,872 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of securities available for sale 29,106 41,950 22,706 Purchase of securities available for sale (17,465) (22,992) (14,458) Proceeds from maturities of securities held to maturity 2,657 2,845 2,154 Purchase of securities held to maturity (6,903) (3,271) (1,650) Proceeds from maturities of other securities -- 45 5,055 Purchase of other securities -- -- (58) Net change in portfolio loans (7,955) (12,041) (12,314) Premises and equipment expenditures (324) (1,785) (1,330) Proceeds from the sale of premises and equipment -- 550 -- -------- -------- -------- Net cash (used in) provided by investing activities (884) 5,301 105 CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 3,661 (2,072) (1,974) Dividends paid (2,816) (2,800) (2,709) Net proceeds from exercise of stock options -- 62 52 Purchases of common stock (1,038) (5) (98) -------- -------- -------- Net cash used in financing activities (193) (4,815) (4,729) -------- -------- -------- Net change in cash and cash equivalents 2,460 2,869 (752) Cash and cash equivalents at beginning of year 14,812 11,943 12,695 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,272 $ 14,812 $ 11,943 ======== ======== ======== Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 5,847 $ 4,594 $ 3,069 Income taxes 1,063 1,156 1,214 Non-cash transactions: Transfer from loans to other real estate owned 606 1,053 590
See accompanying notes to consolidated financial statements. 5. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include CNB Corporation (the Company) and its wholly-owned subsidiary, Citizens National Bank of Cheboygan and the Bank's wholly-owned subsidiary, CNB Mortgage Corporation (the Bank and the Mortgage Corporation are hereafter collectively referred to as the Bank). All significant intercompany accounts and transactions are eliminated in consolidation. Nature of Operations and Concentrations of Credit Risk: The Company is a one-bank holding company which conducts no direct business activities. All business activities are performed by the Bank. The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and light industries located in its service area. It maintains a diversified loan portfolio, including loans to individuals for home mortgages, automobiles, personal expenditures and loans to business enterprises for current operations and expansion. The Bank offers a variety of deposit accounts, including checking, savings, money market, individual retirement accounts and certificates of deposit. The principal markets for the Bank's financial services are the Michigan communities in which the Bank is located and the area immediately surrounding these communities. The Bank serves these markets through eight offices located in Cheboygan, Presque Isle and Emmet Counties in northern lower Michigan. Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, pension obligation, the value of mortgage servicing rights, and fair values of financial instruments are particularly subject to change in the near term. Cash Flow Reporting: Cash and cash equivalents include cash and due from banks and federal funds sold. Net cash flows are reported for customer loan and deposit transactions. Securities: Securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in shareholders' equity, net of tax. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recover in fair value. (Continued) 6. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Other securities, which include Federal Reserve Bank stock, Federal Home Loan Bank stock and other taxable securities that are not readily marketable, are carried at cost. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market on an aggregate basis. Loan Income: Interest income is earned on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days (180 days for residential mortgages). All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. (Continued) 7. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the assets' useful lives. For furniture and fixtures the useful life ranges from three to five years while the useful life for buildings is thirty-nine years. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are charged to expense and improvements are capitalized. Other Real Estate Owned: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of the loan carrying amount or fair value at acquisition. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in other expenses. As of December 31, 2007, other assets on the consolidated balance sheet includes $1,446,000 of other real estate owned. As of December 31, 2006 the balance was $1,059,000. Servicing Rights: Servicing rights represent the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Company Owned Life Insurance: The Company has purchased life insurance policies on certain directors and executives. Company owned life insurance is recorded at its cash surrender value, or the amount that can be effectively realized at the balance sheet date. At December 31, 2007 and 2006, the cash surrender value of the underlying policies was $3,231,000 and $3,191,000, which is included in other assets on the balance sheet. (Continued) 8. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Employee Benefits: A defined benefit pension plan covers substantially all employees, with benefits based on years of service and compensation prior to retirement. Contributions to the plan are based on the maximum amount deductible for income tax purposes. A 401(k) savings and retirement plan has also been established and covers substantially all employees. Contributions to the 401(k) plan are expensed as made. Stock Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard 123R, Share Based Payment, using the modified prospective method which will require recording compensation cost for the fair value of stock based compensation. No awards were granted or vested in 2006, therefore adoption of this standard had no impact in 2006. The stock option plan created in 1996 ended in May 2006. A new stock option plan has not been adopted and no stock compensation was paid in 2007, therefore this accounting standard had no impact in 2007. Prior to January 1, 2006 employee compensation expense under stock options was reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Earnings Per Share: Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional potential shares issuable under stock options. Stock Splits and Stock Dividends: Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Stock splits are recorded by adjusting par value. Fractional shares are paid in cash for all stock splits and dividends. Basic earnings per share, diluted earnings per share and dividends per share are restated for all stock splits and stock dividends. Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal course of business, makes commitments to extend credit which are not reflected in the consolidated financial statements. A summary of these commitments is disclosed in Note 12. (Continued) 9. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Comprehensive Income: Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in unrealized gains (loss) on securities available for sale, net of tax, and components of the defined benefit pension obligation net yet recognized as components of periodic pension expense, including unrecognized gains or losses, prior service cost, and the transition asset which are also recognized as a separate component of shareholder's equity. Unrealized gains and losses on securities available for sale recognized in accumulated other comprehensive income totaled $147,000 and ($190,000) at December 31, 2007 and 2006 respectively (see Note 2). Amounts related to the defined benefit pension plan recognized in accumulated other comprehensive income consist of the following at December 31:
2007 2006 ------ ------ (In thousands) Unrecognized net gains/losses $1,134 $1,028 Unrecognized transition amount (4) (13) Unrecognized prior service amount 33 34 ------ ------ Net amount recognized $1,163 $1,049 ====== ======
Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance-sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. (Continued) 10. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Adoption of New Accounting Standards: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-based Payment. See "Stock Compensation" above for further discussion of the effect of adopting this standard. In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit retirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet, beginning with year end 2006, and to recognize changes in the funded status in the year in which the changes occur through comprehensive income beginning in 2007. Additionally, defined benefit plan assets and obligations are to be measured as of the date of the employer's fiscal year-end, starting in 2008. Adoption had the following effect on individual line items in the 2006 balance sheet:
Before After Application of Application of SFAS No. 158 Adjustments SFAS No.158 -------------- ----------- -------------- (in thousands) Asset (liability) for pension benefits $ 1,131 $(1,049) $ 82 Deferred income tax assets 728 357 1,085 Total assets 252,592 (692) 251,900 Accumulated other comprehensive income (126) (692) (818) Total stockholders' equity 25,690 (692) 24,998
(Continued) 11. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which is effective for fiscal years ending on or after November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB 108, are to be recorded upon initial adoption of SAB 108. The amount so recorded is shown as a cumulative effect adjustment is recorded in opening retained earnings as of January 1, 2006. The cumulative effect adjustment primarily reflects an over accrual of income tax liabilities relating primarily to years prior to 2006. Over a course of years, accrual differences that were considered immaterial to any particular prior year's statement of operations accumulated to a total of a net credit of $159,000. The impact of the over accrual on the 2006 opening consolidated shareholder's equity and retained earnings was $159,000. The impact on selected balance sheet accounts as of January 1, 2006 is as follows:
January 1, 2006 ---------------------------------- Previously Opening Reported Adjustment Balance ---------- ---------- -------- (In thousands) Other liabilities $ 4,795 $(159) $ 4,636 Total liabilities 228,232 (159) 228,073 Retained earnings 1,576 159 1,735 Total shareholder' equity 24,499 159 24,658
(Continued) 12. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Effect of Newly Issued But Not Yet Effective Accounting Standards: EMERGING ISSUES TASK FORCE ISSUE 06-4 - ACCOUNTING FOR DEFERRED COMPENSATION AND POSTRETIREMENT BENEFIT ASPECTS OF ENDORSEMENT SPLIT-DOLLAR LIFE INSURANCE ARRANGEMENTS - In September 2006, the Emerging Issues Task Force Issue 06-4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements was ratified. EITF 06-4 Addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying EITF 06-4 must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. For calendar year companies, EITF 06-4 was effective beginning January 1, 2007. The adoption of EITF 06-4 did not have an effect on our financial statements. FASB NO. 157 AND FASB NO. 159 - FAIR VALUE MEASUREMENT AND THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - SFAS No. 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. It applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 157 and SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Corporation did not early adopt and does not anticipate the adoption of these statements to have a significant effect on the consolidated financial statements. FASB INTERPRETATION NO. 48 - ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - In July 2006, the Financial Accounting Standards Board (FASB) issued this interpretation to clarify the accounting for uncertainty in tax positions. FIN 48 requires, among other matters, that the Corporation recognizes in its consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 became effective as of the beginning of the Corporation's 2007 fiscal year with no significant effect on the financial statements. FASB NO. 141(R) -- BUSINESS COMBINATIONS - In December 2007, the FASB issued Statement No. 141(Revised), Business Combinations. This statement prescribes changes to the method of accounting for acquisitions. All assets and liabilities acquired are to be adjusted to fair value at the acquisition date. Costs are to be expensed rather than capitalized. Restructuring costs that (Continued) 13. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) the acquirer expects to incur are expensed rather than set up as a liability at the date of acquisition. The standard is effective for fiscal years beginning after December 15, 2008. We have determined that the adoption of FASB 14(R) will not have an effect on our financials, but will result in a difference in the costs if an acquisition were completed after the effective date. NOTE 2 -- SECURITIES The year end fair values and related gross unrealized gains and losses recognized in accumulated other comprehensive income/(loss) for securities available for sale, were as follows:
Gross Gross Fair Unrealized Unrealized Available for Sale Value Gains Losses - ------------------ ------- ---------- ---------- (In thousands) 2007 U.S. Government and agency $12,304 $ 111 $ (1) Mortgage-backed 10,238 39 (31) State and municipal 3,951 31 (2) Money market preferred stocks 14,000 -- -- ------- ----- ----- $40,493 $ 181 $ (34) ======= ===== ===== 2006 U.S. Government and 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 year end carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
Gross Gross Carrying Unrecognized Unrecognized Fair Held to Maturity Amount Gains Losses Value - ---------------- -------- ------------ ------------ ------ (In thousands) 2007 State and municipal $8,789 $118 $(25) $8,882 ====== ==== ==== ====== 2006 State and municipal $4,543 $ 54 $(15) $4,582 ====== ==== ==== ======
There were no sales of securities during 2007, 2006 and 2005. (Continued) 14. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 2 -- SECURITIES (Continued) Securities with unrealized losses at year end 2007 and 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):
Less Than 12 Months 12 Months or More Total ------------------- ------------------- ------------------- Fair Unrealized Fair Unrealized Fair Unrealized 2007 Value Loss Value Loss Value Loss - ---- ------ ---------- ------ ---------- ------ ---------- U.S. Government and agency $ -- $ -- $ 998 $ (1) $ 998 $ (1) Mortgage-backed -- -- 3,897 (31) 3,897 (31) State and municipal 1,270 (15) 1,694 (12) 2,964 (27) Money market preferred stocks -- -- -- -- -- -- ------ ---- ------ ---- ------ ---- Total temporarily impaired $1,270 $(15) $6,589 $(44) $7,859 $(59) ====== ==== ====== ==== ====== ====
Less Than 12 Months 12 Months or More Total -------------------- -------------------- -------------------- Fair Unrealized Fair Unrealized Fair Unrealized 2006 Value Loss Value Loss Value Loss - ---- ------- ---------- ------- ---------- ------- ---------- U.S. Government and agency $ 2,724 $ (3) $17,911 $(122) $20,635 $(125) Mortgage-backed 1,848 (3) 6,546 (104) 8,394 (107) State and municipal 2,591 (3) 3,306 (25) 5,897 (28) Money market preferred stocks 10,984 (16) -- -- 10,984 (16) ------- ---- ------- ----- ------- ----- Total temporarily impaired $18,147 $(25) $27,763 $(251) $45,910 $(276) ======= ==== ======= ===== ======= =====
Unrealized losses at year end 2007 and 2006 have not been recognized into income because they are not considered to be other-than-temporary. Management considers the unrealized losses to be market driven, resulting from changes in interest rates, and the Company has the intent and ability to hold the securities until their value recovers. (Continued) 15. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 2 -- SECURITIES (Continued) Contractual maturities of debt securities at year end 2007 are shown below (in thousands). Expected maturities may differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Available Held to Maturity for sale ----------------- Fair Carrying Fair Value Amount Value --------- -------- ------ Due in one year or less $20,839 $2,810 $2,812 Due from one to five years 8,201 2,382 2,448 Due from five to ten years 545 2,757 2,795 Due after ten years 670 840 827 Mortgage-backed 10,238 -- -- ------- ------ ------ $40,493 $8,789 $8,882 ======= ====== ======
There were no securities pledged at December 31, 2007 and securities with a carrying value of $678,000 were pledged at December 31, 2006 to secure public deposits and for other purposes. The Company held securities exceeding 10% of shareholders' equity from the following states (including its political subdivisions) at December 31:
2007 2006 ------ ------ (In thousands) Michigan $9,392 $8,369
NOTE 3 -- LOANS Year end loans were as follows:
2007 2006 -------- -------- (In thousands) Residential real estate $ 83,264 $ 82,842 Consumer 8,709 9,444 Commercial real estate 68,445 61,740 Commercial 14,234 13,208 -------- -------- 174,652 167,234 Deferred loan origination fees, net (28) (6) Allowance for loan loses (1,670) (1,498) -------- -------- $172,954 $165,730 ======== ========
(Continued) 16. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 3 -- LOANS (Continued) Activity in the allowance for loan losses is summarized as follows:
2007 2006 2005 ------ ------ ------ (In thousands) Beginning balance $1,498 $1,456 $1,350 Provision for loan losses 275 120 120 Charge-offs (126) (104) (28) Recoveries 23 26 14 ------ ------ ------ Ending Balance $1,670 $1,498 $1,456 ====== ====== ======
There were eight loans in the real estate mortgage and commercial loan portfolios that were considered impaired as of year end 2007. These loan balances totaled $1.2 million at December 31, 2007. Six of the eight loans considered impaired have a valuation allowance against loss potential. The balance of these six loans at December 31, 2007 totaled $518,000 and the valuation allowance was $83,000. The income recorded on these loans during 2007 while they were considered impaired was $52,000. There were no impaired loans during 2006 or 2005. Nonperforming loans were as follows:
2007 2006 ---- ---- (In thousands) Loans past due over 90 days still on accrual $387 $177 Nonaccrual loans 831 --
NOTE 4 -- LOAN SERVICING Mortgage loans serviced for others are not reported as assets. These loans totaled $74,849,000 and $73,102,000 at year end 2007 and 2006. Related escrow deposit balances were $99,000 and $110,000. Capitalized mortgage servicing rights balances were $664,000 and $618,000 at year end 2007 and 2006. There was no valuation allowance at year end 2007 or 2006. The related additions recognized were $106,000, $94,000 and $130,000 and the amortization was $59,000, $62,000 and $62,000 in 2007, 2006 and 2005. (Continued) 17. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 5 -- PREMISES AND EQUIPMENT Year end premises and equipment were as follows:
2007 2006 ------- ------- (In thousands) Real estate and buildings $ 7,156 $ 7,106 Furniture and fixtures 4,447 4,911 ------- ------- 11,603 12,017 Less accumulated depreciation (5,250) (5,391) ------- ------- $ 6,353 $ 6,626 ======= =======
Depreciation expense amounted to $585,000, $573,000 and $487,000 in 2007, 2006 and 2005. NOTE 6 -- DEPOSITS Time deposit accounts individually exceeding $100,000 total $25,503,000 and $26,415,000 at year end 2007 and 2006. At year end 2007, the scheduled maturities of time deposits are as follows: (In thousands) 2008 $51,996 2009 32,429 2010 1,491 2011 2,925 2012 1,505 ------- $90,346 =======
(Continued) 18. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 7 -- EMPLOYEE BENEFITS Defined Benefit Retirement Plan: The Company has a defined benefit, noncontributory pension plan which provides retirement benefits for essentially all employees. The Company uses a December 31 measurement date for its plan. The following sets forth the plan's funded status and amounts recognized in the financial statements:
2007 2006 ------- ------- (In thousands) Change in benefit obligation: Beginning benefit obligation $(4,672) $(4,551) Service cost (164) (242) Interest cost (301) (293) Actuarial loss (gain) (71) 169 Benefits paid 920 245 ------- ------- Ending benefit obligation (4,288) (4,672) Change in plan assets, at fair value: Beginning plan assets 4,754 4,185 Actual return 206 503 Employer contribution 200 311 Benefits paid (920) (245) ------- ------- Ending plan assets 4,240 4,754 ------- ------- Funded status $ (48) $ 82 ======= =======
Amounts recognized in the balance sheet consist of:
2007 2006 ---- ---- (In thousands) Other assets $ -- $82 Accrued pension costs - other liabilities (48) --
(Continued) 19. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 7 -- EMPLOYEE BENEFITS (Continued) The accumulated benefit obligation for the defined benefit pension plan was $3,145,000 and $3,465,000 at year end 2007 and 2006, respectively. Components of net periodic benefit cost are as follows:
2007 2006 2005 ----- ----- ----- (In thousands) Service cost $ 164 $ 242 $ 189 Interest cost on benefit obligation 301 293 290 Expected return on plan assets (385) (344) (279) Net amortization and deferral 23 48 60 ----- ----- ----- Pension expense $ 103 $ 239 $ 260 ===== ===== =====
The estimated net (gain)/loss and prior service costs that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $41,000 and $1,000. The following weighted-average assumptions were used to determine benefit obligations at year end and net cost:
2007 2006 2005 ---- ---- ---- Weighted Average discount rate 6.50% 6.50% 6.50% Rate of increase in future compensation 3.00% 4.00% 4.00% Expected long term return on plan assets 8.00% 8.00% 8.00%
(Continued) 20. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 7 -- EMPLOYEE BENEFITS (Continued) The Company's pension plan asset allocation at year end 2007 and 2006, target allocation for 2008, and expected long-term rate of return by asset category are as follows:
Percentage of Plan Assets Weighted- Target at Year end Average Expected Allocation ------------------ Long-Term Rate Asset Category 2008 2007 2006 of Return - 2007 - -------------- ---------- ----- ----- ---------------- Equity securities 70.0% 58.4% 67.5% 9.45% Fixed Income securities 30.0 31.2 29.4 5.20 Other -- 10.4 3.1 3.25 ----- ----- ----- ---- Total 100.0% 100.0% 100.0% 8.00% ===== ===== ===== ====
Plan assets are administered by Huntington National Bank as trustee of the plan. Plan assets are invested in diversified mutual funds. The estimates of weighted average expected long-term rate of return is an estimate based on past performance and actual returns in the future are likely to vary over time. The overall expected long-term rate of return and risk expectations of the investments in the plan are based on Standard and Poor's 500 and 5-year Treasury bonds from 1950-2005. The asset mix of the portfolio will be maintained by periodically re-balancing this account back to the stock and fixed income target allocations stated above. The investments in the plan are managed for the benefits of the participants. They are structured to meet the cash flow necessary to pay retiring employees. ERISA guidelines for diversification of the investments are followed. During 2007, the Company contributed $200,000 into the plan. The Company expects to contribute approximately $220,000 to this pension plan in 2008. (Continued) 21. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 7 -- EMPLOYEE BENEFITS (Continued) Estimated Future Payments The following benefit payments, which reflect expected future service, are anticipated:
Year End Benefit Payments - -------- ---------------- (In thousands) 2008 $103 2009 97 2010 91 2011 108 2012 132 Years 2013 - 2018 928
Deferred Compensation Plan: The Company has a deferred compensation plan to provide retirement benefits to certain Directors, at their option, in lieu of annual directors' fees. The present value of future benefits are accrued annually over the period of active service of each participant using a 6.00% discount rate. Total liabilities under the plan are $2,593,000 and $2,476,000 at December 31, 2007 and 2006 and included in other liabilities on the balance sheet. The expense for the plan was $266,000, $280,000 and $656,000 in 2007, 2006 and 2005. During 2005 an additional $315,000 was expensed to the deferred compensation plan to recognize the accelerated benefit amount payable due to the death of a director. The Company also has a deferred compensation plan that allows executive officers of the Bank, and certain Directors an opportunity to defer a portion of their compensation. On a monthly basis, the account of each participant accrues interest based on the interest rate determined for that year. Total liabilities under the plan are $682,000 and $671,000 at December 31, 2007 and 2006. The expense of the plan was $44,000, $37,000 and $33,000 in 2007, 2006 and 2005. 401(k) Plan: The Company has a 401(k) savings and retirement plan covering substantially all employees. Under the plan, employees may defer up to the lesser of 100% of their eligible compensation or the limitations set by the IRS. The employees may also make "catch-up" contributions to the extent the IRS allows. During 2007, 2006 and 2005, the Board of Directors elected to contribute a matching contribution equal to 100% of the first 2% and 50% of the next 2% of the employee's deferred compensation. Employee contributions and the Company's matching percentages are vested immediately. The Company's matching percentages are determined annually by the Board of Directors and resulted in total contributions of $81,000, $80,000 and $71,000 in 2007, 2006 and 2005. (Continued) 22. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 8 -- STOCK OPTIONS Stock Option Plan: The shareholders approved an incentive stock option plan in May 1996 under which up to 67,005 options, as adjusted for stock splits, may be issued at market prices to employees. The right to exercise the options vests over a one-year period. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. Shares issued when options are exercised come from authorized but unissued shares. All options outstanding are exercisable. Due to the plan end date, there were no options available for grant as of December 31, 2007. Activity in the option plan for the years ended, and as restated for all stock dividends, is summarized as follows:
Weighted Weighted Number of Average Average Aggregate Outstanding Exercise Exercise Contractual Intrinsic Options Price Price Term Value ----------- ------------ -------- ----------- --------- Outstanding at January 1, 2007 23,438 $33.62-57.01 $49.00 Exercised -- Forfeitures -- ------ ------------ ------ Outstanding at December 31, 2007 23,438 $33.62-57.01 $49.00 2.8 years $2,000 ====== ============ ====== ========= ====== Exercisable at December 31, 2007 23,438 $33.62-57.01 $49.00 2.8 years $2,000 ====== ============ ====== ========= ======
No compensation expense was required to be recognized under the plan for 2007, 2006 and 2005. There was no unrecognized compensation expense at December 31, 2007. Information related to the stock option plan during each year follows:
2007 2006 2005 ---- ------- ------- Intrinsic value of options exercised -- $36,000 $11,000 Cash received from option exercises -- 62,000 52,000
No tax benefit was realized from exercises in 2007 and 2006. There were no options granted in 2007, 2006 and 2005. (Continued) 23. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 9 -- INCOME TAXES Income tax expense consists of:
2007 2006 2005 ------ ------ ------ (In thousands) Current $1,221 $1,206 $ 944 Deferred expense (benefit) (139) 120 296 ------ ------ ------ $1,082 $1,326 $1,240 ====== ====== ======
Year end deferred tax assets and liabilities consist of:
2007 2006 ------ ------ (In thousands) Deferred tax assets Allowance for loan losses $ 420 $ 362 Deferred compensation 1,114 1,070 Recognized pension liability 396 357 Unrealized losses on securities available for sale 50 65 Other 24 5 ------ ------ Total deferred tax assets 2,004 1,859 ------ ------ Deferred tax liabilities Pension expense 418 385 Fixed assets 373 382 Mortgage servicing rights 226 210 Accretion 39 67 Other 39 69 ------ ------ Total deferred tax liability 1,095 1,113 ------ ------ Net deferred tax asset $ 909 $ 746 ====== ======
(Continued) 24. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 9 -- INCOME TAXES (Continued) Income tax expense calculated at the statutory rate of 34% differs from actual income tax expense as follows:
2007 2006 2005 ------ ------ ------ (In thousands) Statutory rate applied to income before taxes $1,418 $1,581 $1,540 Deduct Tax-exempt interest income, net (311) (188) (183) Life insurance (50) (6) (113) Other 25 (61) (4) ------ ------ ------ $1,082 $1,326 $1,240 ====== ====== ======
NOTE 10 -- EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic earnings per share and diluted earnings per share computations is presented below:
2007 2006 2005 ---------- ---------- ---------- Basic earnings per share Net income available to common shareholders (in thousands) $ 3,088 $ 3,323 $ 3,288 ========== ========== ========== Weighted average shares outstanding 1,232,211 1,238,354 1,237,217 Basic earnings per share $ 2.51 $ 2.68 $ 2.66 ========== ========== ==========
(Continued) 25. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 10 -- EARNINGS PER SHARE (Continued)
2007 2006 2005 ---------- ---------- ---------- Diluted earnings per share Net income available to common shareholders (in thousands) $ 3,088 $ 3,323 $ 3,288 ========== ========== ========== Weighted average shares outstanding 1,232,211 1,238,354 1,237,217 Add dilutive effects of assumed exercises of stock options 704 1,427 2,603 ---------- ---------- ---------- Weighted average dilutive potential shares outstanding 1,232,915 1,239,781 1,239,820 ========== ========== ========== Diluted earnings per share $ 2.50 $ 2.68 $ 2.65 ========== ========== ==========
Stock options for 19,407 shares of common stock were not considered in computing diluted earnings per share for 2007 and 2006 because they were antidilutive. NOTE 11 -- RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and the Bank (including family members, affiliates and companies in which they are principal owners) had loans outstanding with the Bank in the ordinary course of business. A summary of the aggregate loans outstanding to these individuals follows:
2007 2006 ------ ------ (In thousands) Balance outstanding, January 1 $2,145 $2,186 New loans and rewrites 511 363 Payments and payoffs (382) (403) Change in persons included 42 (1) ------ ------ Balance outstanding, December 31 $2,316 $2,145 ====== ======
Related party deposits totaled $3,014,000 and $2,402,000 at year end 2007 and 2006. (Continued) 26. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 12 -- COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES There are various contingent liabilities that are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or result of operations of the Company. At year end 2007 and 2006, reserves of $1,646,000 and $1,770,000 were required as deposits with the Federal Reserve or as cash on hand. These reserves do not earn interest. Some financial instruments are used in the normal course of business to meet the financing needs of customers and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to a varying degree, credit and interest-rate risk in excess of the amount reported in the financial statements. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. The same credit policies are used for commitments and conditional obligations as are used for loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being used, the total commitments do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments to guarantee a customer's performance to a third party. A summary of the unused contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:
2007 2006 ------- ------- (In thousands) Commitments to extend credit $23,893 $19,232 Standby letters of credit 579 501
The fair values of these commitments are not material. Substantially all of these commitments are at variable or uncommitted rates. (Continued) 27. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 13 -- FAIR VALUES 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 rate 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 year end values of financial instruments were:
2007 2006 --------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- (In thousands) Assets Cash and cash equivalents $ 17,272 $ 17,272 $ 14,812 $ 14,812 Securities available for sale 40,493 40,493 51,331 51,331 Securities held to maturity 8,789 8,882 4,543 4,582 Other securities 1,008 1,008 1,008 1,008 Loans, net 172,954 173,666 165,730 168,837 Accrued interest receivable on loans 850 850 823 823 Liabilities Deposits Noninterest-bearing $ (37,984) $ (37,984) $ (39,620) $ (39,620) Interest bearing (187,042) (186,860) (181,745) (181,613) Accrued interest payable on deposits 217 217 206 206
NOTE 14 -- REGULATORY CAPITAL The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. (Continued) 28. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 14 -- REGULATORY CAPITAL (Continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Capital to Risk-Weighted Tier 1 Assets Capital To -------------- Average Total Tier 1 Assets ----- ------ ---------- Well Capitalized 10% 6% 5% Adequately Capitalized 8% 4% 4% Undercapitalized 6% 3% 3%
The Bank was categorized as well capitalized at year end. There are no conditions or events since year-end that management believes has changed the Bank's category. Actual capital levels (in millions) and minimum required levels were:
Minimum Required To Be Well Minimum Capitalized Required Under Prompt For Capital Corrective Adequacy Action Actual Purposes Regulations -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2007 Total capital (to risk weighted assets) Bank $26.6 14.4% $14.8 8.0% $18.5 10.0% Tier 1 capital (to risk weighted assets) Bank 24.9 13.5 7.4 4.0 11.1 6.0 Tier 1 capital (to average assets) Bank 24.9 9.9 10.1 4.0 12.6 5.0 2006 Total capital (to risk weighted assets) Bank $27.1 15.4% $14.1 8.0% $17.6 10.0% Tier 1 capital (to risk weighted assets) Bank 25.7 14.6 7.0 4.0 10.6 6.0 Tier 1 capital (to average assets) Bank 25.7 10.1 10.1 4.0 12.7 5.0
(Continued) 29. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 14 -- REGULATORY CAPITAL (Continued) One of the principal sources of cash for the Company is dividends from the Bank. Regulatory agencies can place dividend restrictions on the Bank based on their evaluation of its financial condition. No restrictions are currently imposed by regulatory agencies on the Bank other than the limitations found in the regulations which govern the payment of dividends to the Company. Under the most restrictive of these regulations, in 2008, the Bank is limited to paying dividends of approximately the 2008 net income, without prior regulatory approval. NOTE 15 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following are condensed parent company financial statements: CONDENSED BALANCE SHEETS December 31, 2007 and 2006
2007 2006 ------- ------- (In thousands) ASSETS Cash $ 32 $ 94 Investment in subsidiary 24,341 24,912 Dividends receivable 1,266 1,266 Other assets 14 -- ------- ------- Total assets $25,653 $26,272 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 1,253 $ 1,274 Shareholders' equity 24,400 24,998 ------- ------- Total liabilities and shareholders' equity $25,653 $26,272 ======= =======
(Continued) 30. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 15 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 2007, 2006 and 2005
2007 2006 2005 ------ ------ ------ (In thousands) Dividends from subsidiary $3,832 $2,832 $2,826 Operating expenses (40) (46) (44) ------ ------ ------ Income before income taxes and equity in undistributed income of subsidiary 3,792 2,786 2,782 Income tax benefit 14 15 15 Equity in undistributed/(over distributed) income of subsidiary (718) 522 491 ------ ------ ------ NET INCOME $3,088 $3,323 $3,288 ====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 2007, 2006 and 2005
2007 2006 2005 ------- ------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,088 $ 3,323 $ 3,288 Equity in (undistributed)/overdistributed net income of subsidiary 718 (522) (491) Change in dividends receivable -- (30) 24 Change in other assets (14) -- -- Change in other liabilities (21) -- -- ------- ------- ------- Net cash from operating activities 3,771 2,771 2,821 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (2,795) (2,800) (2,709) Net shares purchased (1,038) 57 (46) ------- ------- ------- Net cash from financing activities (3,833) (2,743) (2,755) ------- ------- ------- Net change in cash and cash equivalents (62) 28 66 Cash at beginning of year 94 66 -- ------- ------- ------- CASH AT END OF YEAR $ 32 $ 94 $ 66 ======= ======= =======
(Continued) 31. CNB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007, 2006 and 2005 NOTE 16 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings Net Per Share Interest Interest Net --------------- Income Income Income Basic Diluted -------- -------- ------ ----- ------- (In thousands, except per share data) 2007 First quarter $3,929 $2,461 $630 $0.51 $0.51 Second quarter 4,077 2,559 801 0.65 0.65 Third quarter 4,161 2,662 831 0.67 0.67 Fourth quarter 4,013 2,640 826 0.68 0.67 2006 First quarter $3,507 $2,512 $694 $0.56 $0.56 Second quarter 3,628 2,497 996 0.80 0.80 Third quarter 3,886 2,657 794 0.64 0.64 Fourth quarter 3,948 2,631 839 0.68 0.68
During the second quarter of 2006 the Bank received a gain on the sale of property in the amount of $521,000. (Continued) 32. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Of CNB Corporation Cheboygan, Michigan We have audited the accompanying consolidated balance sheet of CNB Corporation as of December 31, 2007, and the related consolidated statement of income, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CNB Corporation as of December 31, 2007, and the results of its operations and its cash flows for the years ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Plante & Moran, PLLC Grand Rapids, Michigan March 28, 2008 33. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders CNB Corporation Cheboygan, Michigan We have audited the accompanying consolidated balance sheet of CNB Corporation as of December 31, 2006, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CNB Corporation as of December 31, 2006 and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note 1, the Company adopted Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatement when Quantifying Misstatements in Current Year Financial Statements" (SAB 108) and Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statement No. 87, 88, 106 and 132(R)" (SFAS No. 158) during 2006. Accordingly liabilities at the beginning of 2006 were adjusted with an offsetting adjustment to the opening balance of retained earnings under SAB 108 and year-end assets were adjusted with an offsetting adjustment to accumulated other comprehensive loss under SFAS No. 158. Crowe Chizek and Company LLC Grand Rapids, Michigan March 30, 2007 34. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 This discussion provides information about the consolidated financial condition and results of operations of CNB Corporation (the Company) and its wholly-owned subsidiary, Citizens National Bank of Cheboygan and the Bank's wholly-owned subsidiary, CNB Mortgage Corporation (the Bank and the Mortgage Corporation are hereafter collectively referred to as the Bank). This discussion should be read in conjunction with the consolidated financial statements beginning on page 2 and the related footnotes. FINANCIAL CONDITION The overall financial condition of the Company was strong for 2007. The Company recognized a 4.4% increase in the loan portfolio. Deposits increased by 1.7% during 2007 while the Company's equity decreased during 2007 due to the stock repurchase program. CASH AND CASH EQUIVALENTS The Company's balances of cash and cash equivalents increased $2,460,000 from 2006 to 2007. During the year, $3.5 million of cash was provided from operating activities due primarily to net income, while $884,000 was used in investing activities. The company utilized $193,000 on financing activities. The balances maintained in cash and cash equivalents vary based on daily fluctuations in loan and deposit balances. Sufficient cash is maintained on a daily basis to meet the anticipated liquidity needs of the Company for customer transactions and to clear checks drawn on other financial institutions. The amount of clearings can vary by as much as $3.0 million in one day, causing the Company's cash position to vary. SECURITIES The Company maintains securities portfolios that include obligations of federal agencies and government sponsored entities as well as securities issued by states and political subdivisions and money market preferred investments. Security balances decreased $6.6 million during 2007. Securities available for sale represent 80.5% of the portfolio. Currently, the Company primarily maintains a short-term securities portfolio. The Company is looking to extend the average life of the portfolio moving forward to gain some additional interest rate due to the changing rate environment and decreasing short-term rates. As the amount of securities maturing on a regular basis decreases, liquidity will be maintained by adding to the available for sale portfolio. The reason for the decrease in the securities portfolio during 2007 is due to the fact that as the securities matured, the Company did not reinvest as many dollars back into securities as it has in the past. This was due to the increased loan demand. The Company used the dollars from the securities maturities to fund higher yielding loans. It is management's expectation that the Company will continue to change the balance sheet mix in this manner during 2008. 35. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 The chart below shows the change in each of the categories of the portfolio.
2007 2006 2005 ------- -------- -------- (In thousands) U.S. Government and agency $(9,004) $(27,792) $ (7,687) Mortgage-backed (252) 2,351 4,991 Tax exempt state and municipal (407) (1,609) (4,149) Taxable state and municipal 55 (1,492) (2,624) Money market preferred stocks 3,016 10,984 -- Other securities -- (45) (4,997) ------- -------- -------- Total change in securities $(6,592) $(17,603) $(14,466) ======= ======== ========
Holdings in U.S. government and agencies decreased due to a change in the focus of our securities portfolio. Upon the availability of a newly approved securities investment option, during the second half of 2006, monies from securities maturities were mainly placed into money market preferred stock investments due to their superior rate and tax favorable treatment. Securities investments as a total decreased during the year primarily due to our increased loan activity funding requirements. The Company maintains a short-term investment portfolio with maturities averaging less than two years. The Company will continue to monitor the rate environment and may extend the maturities of the investment portfolio in the future. The chart below shows the percentage composition of the portfolio as of December 31.
2007 2006 ------ ------ U.S. Government and agency 24.47% 37.46% Mortgage backed 20.36% 18.44% Tax exempt state and municipal 24.31% 22.21% Taxable state and municipal 1.02% 0.81% Money market preferred stocks 27.84% 19.31% Other securities 2.00% 1.77% ------ ------ 100.00% 100.00% ====== ======
Securities available for sale are recorded at fair value and securities held to maturity are recorded at amortized cost. The net unrealized gain on securities available for sale at December 31, 2007 was $97,000, net of taxes. The unrealized gains and losses are temporary since they are a result of market changes rather than a reflection of credit quality. Management has no specific intent to sell these securities at the present time. 36. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 The Company maintains a conservative security portfolio with the majority of the mix of its investments spread amongst U.S. Government and agency securities, issues of governmental units in its service area and money market preferred stocks. The maturities of the investment portfolio have typically been very short, two years or less, providing liquidity in addition to quality to the balance sheet. Investments in mortgage backed securities are not part of the subprime sector. During 2008, management feels that there will be sufficient liquidity to increase the maturity of the investment portfolio. LOANS Total loans increased $7.4 million or 4.4% during 2007, with the primary increase in commercial real estate loans of $6.7 million or 10.9%. As a full service lender, the Company offers a variety of personal and commercial loans. Home mortgages comprise the largest portion of the loan portfolio. The Company generally retains the ownership of adjustable rate loans and short to medium-term fixed-rate loans and originates and sells long-term single family residential fixed-rate mortgage loans to the secondary market. This practice allows the Company to meet the housing credit needs of its service area while maintaining an appropriate interest rate sensitivity and liquidity position. The Company does not practice subprime lending and does not have any loans that it would consider to be subprime mortgage loans. The Company originated $9.1 million in loans for sale in 2007 and $7.4 million in 2006 as compared to $11.6 million in 2005. Although the real estate market in our service area has declined somewhat, it has not been effected by the current economy as much as some areas in the state of Michigan. In fact, management anticipates the volume of mortgage refinancing in 2008 will increase comparable to 2007 due to the decreasing rate environment. In addition to mortgage loans, the Company makes loans for personal and business use, secured and unsecured, to customers in its service area. The Company intends to look for loan opportunities in both the commercial and commercial real estate areas in 2008; however growth is not expected to increase significantly. Current economic conditions warrant the bank adhering to conservative, strict credit underwriting standards. All loans are domestic. An annual review of loan concentrations at December 31, 2007 indicated the pattern of loans in the portfolio has not changed. There is no individual industry with more than a 10% concentration, except for all tourism-related businesses which, when combined, represent 11.3% of total loans. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents that amount which management estimates is adequate to provide for probable incurred losses in the loan portfolio. Management determines the adequacy of the allowance for loan losses by reviewing selected loans (including large loans, nonaccrual loans, problem loans and delinquent loans) and establishes specific loss allowances on these loans. Historical loss information, local economic conditions and other factors are considered in establishing allowances on the remaining loan portfolio. The allowance is increased by provisions charged to expense and reduced by charge-offs, net of recoveries. 37. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 The quality of the Company's loan portfolio compares well with its peer group with non-performing loans at .76% of total loans at December 31, 2007 and 0.11% at December 31, 2006. Net loans charged off were .06% of total loans during 2007 and .05% in 2006. There were no significant changes in the allowance for loan losses in 2007 and 2006 due to stable loan quality and a continued modest identified loss potential for individual loans and groups of loans. A provision expense of $275,000 was recorded in 2007 while $120,000 was recorded during 2006 and 2005 due to net charge-offs and responding to overall loan growth. CREDIT QUALITY The Company continues to maintain an acceptable level of asset quality as a result of actively managing delinquencies, nonperforming assets and potential problem loans. 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 the 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.
2007 2006 ------ ---- (Dollars in thousands) Nonaccrual loans $ 831 $ -- Loans past due 90 days or more still on accural 387 177 Troubled debt restructurings -- -- ------ ---- Total nonperforming $1,218 $177 ====== ==== Percent of total loans 0.70% 0.11% ====== ====
DEPOSITS Deposits increased $3.7 million or 1.7% during 2007. This was due to several factors including a new deposit product offered to high balance municipal deposits. As the interest rate environment changes the Company will in turn change the rates it offers its customers. The majority of the Company's deposits are derived from core customers, as a result of long-term personal, business and public relationships. Deposit rates are monitored continually to assure that the Company pays a competitive rate. As of December 31, 2007, the loan to deposit ratio was 77.6% compared to 75.5% at December 31, 2006. This ratio increased due to a greater increase in the loan portfolio as compared to the increase in the deposit portfolio. Management continues to emphasize loan 38. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 growth with a targeted loan to deposit ratio at a minimum of 65.0%. A change in asset mix from securities to higher yielding loans provides an increase in the net interest margin. As of December 31, 2007, long-term debt obligations consist of the Company's time deposits which are presented in Note 6 to the consolidated financial statements. EQUITY Total equity for the Company at year end 2007 was $24.4 million compared to $25.0 million in 2006. The Company had a stock repurchase program in place and during 2007 in which it repurchased $1 million under the plan. There is no formal stock repurchase plan in effect at this time. The Company also had a stock repurchase program in place during 2005 in which it repurchased $98,000 worth of stock under the plan before the plan ended. In addition, the Company occasionally repurchases stock at its discretion. During 2006 the Company repurchased $5,000 worth of stock. Accumulated other comprehensive income increased by $147,000 as the market value of the Company's available for sale securities improved. This increase to accumulated other comprehensive income was offset by a $75,000 adjustment to reflect the impact of the change in the pension liability as was implemented in 2006 due to SFAS No. 158. LIQUIDITY AND FUNDS MANAGEMENT Effective liquidity management ensures that the cash flow requirements of the Company's depositors and borrowers, as well as the operating cash needs of the Company are met. The Company's primary source of funds is dividends from the Bank. The Company manages its liquidity position to provide cash necessary to pay dividends to shareholders and satisfy other operating requirements. The Company's most readily available sources of liquidity are federal funds sold, securities classified as available for sale and securities classified as held to maturity maturing within one year. These sources of liquidity are supplemented by new deposits and by loan payments received from customers. As of December 31, 2007, the Company held $8.4 million in federal funds sold, $40.5 million in securities available for sale, and $2.8 million in held to maturity securities maturing within one year. These short-term assets represent 22.3% of total deposits as of December 31, 2007. Historically, the Company's security portfolio has been short term in nature, with the average life of the portfolio consistently being less than two years. The Company serves a market which is highly tied to the tourist industry. Consequently, the Company experiences seasonal swings in liquidity. Deposit growth occurs during July, August, and September, then may decline through the fall and winter months. The Company does not anticipate any significant change in its seasonal pattern. In addition to the above readily available sources of liquidity, the Company has lines of credit available from other institutions totaling $14 million. There were no advances outstanding on these lines of credit at December 31, 2007 or 2006. 39. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 INTEREST RATE SENSITIVITY The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates at December 31, 2007 and 2006. For loans receivable, securities, and liabilities with contractual maturities, the tables present principal cash flows and related weighted-average interest rates by contractual maturities, as well as the Company's historical experience relative to the impact of interest rate fluctuations on the prepayment of loans. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the tables present principal cash flows and, as applicable, related weighted-average interest rates based upon the Company's historical experience, management's judgment, and statistical analysis concerning their most likely withdrawal behaviors. The current historical interest rates for core deposits are assumed to apply for future periods in these tables as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted-average variable rates are based upon contractual rates existing at the reporting date. The primary source of market risk for the financial instruments presented is interest rate risk, that is, the risk that a change in market rates could adversely affect the market value of the instruments. Generally, the longer the maturity, the greater 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 assuring sufficient capital and liquidity in support of future balance sheet growth to reducing the exposure of the Company's net interest margin from swings in interest rates. 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 establishes policies and rates which lead to the 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 on shareholders' equity. The following market risk disclosure tables allow management to measure the imbalance between the amount of assets and liabilities repricing in the next five years and thereafter. 40. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 MARKET RISK DISCLOSURE AT DECEMBER 31, 2007 (Dollars in thousands)
Fair Value 2008 2009 2010 2011 2012 Thereafter Total 12/31/2007 ------- ------- ------- ------- ------- ---------- -------- ---------- RATE-SENSITIVE ASSETS Variable interest rate loans $34,701 $ 1,026 $ 557 $ 29 $ -- $ -- $ 36,313 $ 36,461 Average interest rate 7.90% 7.59% 7.81% 7.13% --% --% 7.89% Fixed interest rate loans 13,476 12,831 17,391 18,087 14,884 61,670 138,339 138,903 Average interest rate 7.37% 7.31% 7.19% 7.75% 7.79% 6.70% 7.14% Variable interest rate securities 515 -- -- -- -- 980 1,495 1,495 Average interest rate 4.78% --% --% --% --% 5.25% 5.09% Fixed interest rate securities 23,134 6,048 10,571 2,989 1,387 4,666 48,795 48,888 Average interest rate 5.13% 4.75% 5.16% 5.21% 4.68% 4.47% 4.99% RATE-SENSITIVE LIABILITIES Noninterest-bearing deposits 37,984 -- -- -- -- -- 37,984 37,984 Average interest rate --% --% --% --% --% --% --% Fixed interest rate savings and interest-bearing deposits 96,695 -- -- -- -- -- 96,695 96,667 Average interest rate 1.81% --% --% --% --% --% 1.81% Variable interest rate time deposits 16,626 4,933 -- -- -- -- 21,559 21,553 Average interest rate 3.47% 3.47% --% --% --% --% 3.47% Fixed interest rate time deposits 35,370 27,496 1,715 1,501 2,579 -- 68,661 68,641 Average interest rate 3.81% 4.09% 4.20% 5.10% 4.87% --% 3.99%
MARKET RISK DISCLOSURE AT DECEMBER 31, 2006 (Dollars in thousands)
Fair Value 2007 2008 2009 2010 2011 Thereafter Total 12/31/2006 ------- ------- ------- ------- ------- ---------- -------- ---------- RATE-SENSITIVE ASSETS Variable interest rate loans $30,247 $ 1,229 $ 1,141 $ -- $ -- $ -- $ 32,617 $ 33,223 Average interest rate 8.76% 7.33% 7.72% --% --% --% 8.67% Fixed interest rate loans 15,196 6,563 13,842 17,589 20,160 61,267 134,617 137,118 Average interest rate 7.83% 7.32% 7.24% 7.08% 7.72% 6.58% 7.06% Variable interest rate securities 460 -- -- -- -- 1,073 1,533 1,533 Average interest rate 6.40% --% --% --% --% 5.78% 5.96% Fixed interest rate securities 35,709 6,539 5,055 3,515 1,194 3,337 55,349 55,388 Average interest rate 3.65% 4.16% 4.43% 5.03% 4.58% 4.24% 3.92% RATE-SENSITIVE LIABILITIES Noninterest-bearing deposits 39,620 -- -- -- -- -- 39,620 39,620 Average interest rate --% --% --% --% --% --% --% Fixed interest rate savings and interest-bearing deposits 94,039 -- -- -- -- -- 94,039 93,970 Average interest rate 1.58% --% --% --% --% --% 1.58% Variable interest rate time deposits 11,399 9,837 -- -- -- -- 21,236 21,221 Average interest rate 5.05% 5.05% --% --% --% --% 5.05% Fixed interest rate time deposits 48,093 12,582 1,715 1,501 2,579 -- 66,470 66,422 Average interest rate 4.42% 4.32% 3.83% 4.14% 5.12% --% 4.41%
41. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 CAPITAL RESOURCES The capital ratios of the Bank exceed the regulatory guidelines for well capitalized institutions. This strong capital position of the Company provides the Company with the flexibility to take advantage of expansion opportunities and to continue with a high dividend payout ratio. The stock of the Company is generally traded locally, although beginning in 2007 it is available on the over-the-counter market. Additional information concerning capital ratios and shareholder return is included in the Financial Highlights on page 1. The Company maintains a five-year plan and utilizes a formal strategic planning process. Management and the Board continue to monitor long-term goals, which include increasing market share and maintaining long-term earnings sufficient to pay consistent dividends. RESULTS OF OPERATIONS NET INCOME Consolidated net income was $3.1 million for 2007 and $3.3 million for 2006. Noninterest income decreased during 2007 by $322,000 primarily due to a $521,000 gain recorded on the sale of premises in 2006. Basic earnings per share for 2007 were $2.51 compared to $2.68 for 2006. Diluted earnings per share for 2007 were $2.50 compared to $2.68 for 2006. Consolidated net income was $3.3 million for 2006 and 2005. Noninterest income increased during 2006 by $210,000 primarily due to a gain on sale as mentioned above. This increase in noninterest income was offset by additional noninterest expense of $162,000 a portion of which is attributable to increased occupancy expense to record additional depreciation due to the purchase of new equipment. Basic earnings per share for 2006 were $2.68 compared to $2.66 for 2005. Diluted earnings per share for 2006 was $2.68 compared to $2.65 for 2005. NET INTEREST INCOME Interest income is the total amount earned on funds invested in federal funds sold, securities and loans. Interest expense is the amount of interest paid on interest-bearing checking, money market, savings and time deposits accounts. Net interest income is the difference between interest income and interest expense. The net margin is the net interest income as a percentage of average interest-earning assets. Interest spread is the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. In 2007, net interest income increased by $25,000, due primarily to the change in the rate on our interest-earning assets and the change in asset mix due to the increase in loan volume and decrease in the securities portfolio. Interest expense paid on the Company's deposit accounts also increased in 2007 due to the increase in deposits and the rate environment. The $73,000 increase in net interest income from 2005 to 2006 was due primarily for the same reasons as noted above. 42. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 The following table shows the daily average consolidated balance sheets, revenue on average interest-earning assets on a tax-equivalent basis, expense on average interest-bearing liabilities and the annualized effective yield or rate. Interest on loans includes loan fees. For the periods ending: Yield Analysis of Consolidated Average Assets and Liabilities (Dollars in thousands)
Year Ended Year Ended Year Ended December 31, 2007 December 31, 2006 December 31, 2005 --------------------------- --------------------------- --------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Int Rate Balance Int Rate Balance Int Rate -------- ------- ------ -------- ------- ------ -------- ------- ------ Interest-earning assets: Other interest- earning assets $ 12,129 $ 660 5.44% $ 9,044 $ 477 5.27% $ 7,460 $ 252 3.38% Total securities(1)(2) 55,078 2,774 5.04 66,012 2,572 3.90 85,035 2,921 3.44 Loans(2) 172,136 13,070 7.59 163,139 12,218 7.49 149,672 10,473 7.00 -------- ------- -------- ------- -------- ------- Total interest-earning assets 239,343 16,504 6.90% 238,195 15,267 6.41% 242,167 13,646 5.63% Cash and due from banks 6,635 6,788 6,376 Premises and equipment, net 6,495 5,886 4,785 Allowance for loan losses (1,610) (1,488) (1,412) Other assets 8,020 4,196 5,309 -------- -------- -------- Total $258,883 $253,577 $257,225 ======== ======== ======== Interest-bearing liabilities: Interest-bearing demand deposits $ 23,575 $ 529 2.24% $ 16,227 $ 104 0.64% $ 18,145 $ 88 0.48% Savings deposits 75,677 1,383 1.83 88,781 1,549 1.74 104,415 1,345 1.29 Time deposits 89,984 3,917 4.35 79,320 3,017 3.80 66,300 1,699 2.56 Fed Funds Purchased -- -- 0.00 47 2 4.26 -- -- 0.00 Other interest-bearing liabilities 259 29 11.20 -- -- 0.00 -- -- 0.00 -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities 189,495 5,858 3.09% 184,375 4,672 2.53% 188,860 3,132 1.66% Noninterest-bearing deposits 39,790 40,688 39,825 Other liabilities 4,305 3,128 3,702 Shareholders' equity 25,293 25,386 24,838 -------- -------- -------- Total $258,883 $253,577 $257,225 ======== ======== ======== Net interest income $10,646 $10,595 $10,514 ======= ======= ======= Net interest spread (FTE) 3.81% 3.88% 3.97% ===== ==== ==== Net yield on interest- earning assets (FTE) 4.45% 4.45% 4.34% ===== ==== ==== Ratio of interest-earning assets to interest- bearning liabilities 1.26x 1.29x 1.28x ===== ==== ====
(1) Yield computed using the average amortized cost for securities available for sale. (2) Tax exempt income was converted to a fully taxable equivalent basis at a 34% tax rate. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the TEFRA adjustment applicable to nondeductible interest expenses. 43. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 The table below shows the effect of volume and rate changes on net interest income on a pre-tax basis.
2007 Compared to 2006 2006 Compared to 2005 ---------------------- ------------------------ Volume Rate Net Volume Rate Net ------ ---- ------ ----- ------ ------ (In thousands) Other interest-earning assets $ 167 $ 16 $ 183 $ 62 $ 163 $ 225 Total Securities (456) 658 202 (708) 359 (349) Loans, net 681 171 852 980 765 1,745 ----- ---- ------ ----- ------ ------ Total interest-earning assets 392 845 1,237 334 1,287 1,621 Interest-bearing demand deposits 65 360 425 (10) 26 16 Savings deposits (237) 71 (166) (223) 427 204 Time deposits 434 467 901 380 938 1,318 Fed Funds Purchased (2) -- (2) 2 -- 2 Other interest-bearing liabilities 29 -- 29 -- -- -- ----- ---- ------ ----- ------ ------ Total interest-bearing liabilities 289 898 1,187 149 1,391 1,540 ----- ---- ------ ----- ------ ------ Net change in net interest income (a) $ 103 $(53) $ 50 $ 185 $ (104) $ 81 ===== ==== ====== ===== ====== ======
(a) The net change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. NONINTEREST INCOME Noninterest income includes fees and service charges on deposit accounts, loan servicing fees, gains on sales of loans and other income. Noninterest income decreased $322,000 from 2006 to 2007. This decreases was due to the $521,000 gain on the sale of property recognized in 2006, but was offset by addition deposit fee income of $145,000 due in part to the success of our overdraft privilege program. Noninterest income increased $210,000 from 2005 to 2006 as a result of the $521,000 gain on the sale of our old South Branch property as previously mentioned. This increase was offset in part by $300,000 due to a gain on life insurance that was recognized in 2005. NONINTEREST EXPENSE Noninterest expense increased $27,000 during 2007 compared to 2006. Salary and benefits expense increased $192,000 during 2007 compared to 2006 as the company recognized several retirements throughout the year. These retirees were offered severance packages commensurate to their years of service and contribution to the company. The company changed its hospitalization coverage in 2007. Although the company still funds 100% of the employee hospitalization premium, the company changed to a high deductible plan in 2007. One half of this new deductible was funded by the company into a health savings account for each employee. This change resulted in a decrease in hospitalization expense of $24,000 during 2007 compared to 2006. Pension expense was $103,000 in 2007 as compared to $239,000 in 2006, a decrease of $136,000. This decrease is due to lower services costs on the plan and increased 44. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 revenue. Other expenses decreased $161,000 for 2007 compared to 2006 due primarily to two reasons. The 2006 other expenses included losses on sales or write-downs of other real estate owned and the company received a deduction in the 2007 Michigan Single Business Tax expense due to the property and real-estate placed in service for the new Alanson Branch previously mention. Noninterest expense increased $162,000 during 2006 compared to 2005. Salary and benefit expense increased $232,000 during 2006 compared to 2005 as the company increased its number of employees from 78.0 full-time equivalent employees at December 31, 2005 to 80.5 full-time equivalent employees at December 31, 2006. This increase in employees is due to increased branch hours and new branch facilities, both of which required additional staffing. The Company continues to fund 100% of the employee hospitalization premium which was $591,000 for 2006 compared to $545,000 for 2005. The deferred compensation expense for 2006 was $317,000 compared to $690,000 in 2005. The deferred compensation expense for 2005 includes an expense of $315,000 to recognize the accelerated amount payable due to the death of a director. Occupancy expense increased $140,000 primarily due to additional depreciation on the purchase of new operating equipment and a new building for our relocated South Branch location. Other expense increased $210,000 for 2006 compared to 2005 primarily due to $77,000 of expense due to the loss on sale or write-down of other real estate owned. FEDERAL INCOME TAXES Income tax expense decreased during 2007 to $1.08 million compared to $1.33 million in 2006. Income before taxes decreased from 2006 which resulted in the decrease in income tax expense. The effective tax rates for 2006 and 2005 were fairly stable. The decrease in the effective tax rate for 2007 was due to additional investments in tax favorable money market preferred securities. The tax rates are shown in the table below:
2007 2006 2005 ------ ------ ------ Income before tax (In thousands) $4,170 $4,649 $4,528 Income tax expense (In thousands) 1,082 1,326 1,240 Effective tax rate 25.9% 28.5% 27.4%
The slightly lower effective tax rate in 2005 was due to the nontaxable income in the form of life insurance proceeds received during the year which has been previously discussed. 45. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 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 facts and circumstances. Facts and circumstances which could effect 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 believes that the allowance for loan losses and related provision expense are particularly susceptible to material change in the near term. Due to overall loan growth, a provision expense of $120,000 was recorded during 2006 and 2005. Due to the continued loan growth and a downturn in the overall Michigan economy, a provision expense of $275,000 was recorded during 2007. In future periods the allowance for loan losses may be dramatically impacted due to changes in the local economy, increased commercial loans and individual borrower situations. The Company believes its significant concentration in residential mortgage loans and the importance of the tourism industry to the local economy are particularly important factors that could have a significant impact on the allowance for loan losses and provision for loan losses if these factors significantly change from current conditions. As of December 31, 2007, the Company held $82.7 million of commercial and commercial real estate loans, and the ability of our borrowers to repay such loans may be significantly impacted by changes in the economy or individual borrower conditions. Management continues to take steps to help ensure the asset quality of the loan portfolio; however, the allowance for loan losses and related provision expense could increase significantly in future periods depending on changes in the factors discussed above. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income, net of tax. As a result of changes in the fair market value of the Company's available for sale securities portfolio, total comprehensive income increased by $222,000 and $475,000 for 2007 and 2006 and decreased by $492,000 for 2005. Additionally, all investment securities are required to be written down to fair value when a decline in fair value is not temporary; therefore, future changes in the fair value of securities could have a significant impact on the Company's operating results. 46. CNB CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2007, 2006 and 2005 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 phases, "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 of the date made, and advises 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. 47. CNB CORPORATION OFFICERS, COMMUNITY ADVISORS AND STAFF OFFICERS AND COMMUNITY ADVISORS OF CNB CORPORATION AND CITIZENS NATIONAL BANK CNB CORPORATION OFFICERS VINCENT J. HILLESHEIM CHAIRMAN SUSAN A. ENO PRESIDENT / CHIEF EXECUTIVE OFFICER & SECRETARY DOUGLAS W. DAMM SENIOR VICE PRESIDENT SHANNA L. HANLEY TREASURER CITIZENS NATIONAL BANK OFFICERS AND COMMUNITY ADVISORS VINCENT J. HILLESHEIM CHAIRMAN SUSAN A. ENO PRESIDENT & CHIEF EXECUTIVE OFFICER DOUGLAS W. DAMM SENIOR VICE PRESIDENT & SENIOR LOAN OFFICER STEPHEN J. CRUSOE VICE PRESIDENT, MORTGAGE LOANS VICTORIA J. HAND VICE PRESIDENT & CASHIER SHANNA L. HANLEY VICE PRESIDENT & SENIOR CONTROLLER MARIAN L. HARRISON VICE PRESIDENT, COMMERCIAL LOANS KENNETH N. SHELDON VICE PRESIDENT, EXAMINATION SUSAN L. CASWELL ASSISTANT VICE PRESIDENT CYRIL S. DRIER ASSISTANT VICE PRESIDENT SALLY J. LACROSS ASSISTANT VICE PRESIDENT NANCY K. LINDSAY ASSISTANT VICE PRESIDENT, MARKETING RANDY J. MALTBY TECHNOLOGY OFFICER SUSAN J. CLEARY LOAN OFFICER MICHELLE J. OSTWALD LOAN OFFICER JACK ZLOTOW LOAN OFFICER FLORENCE CASWELL ASSISTANT LOAN OPERATIONS OFFICER CHRISTINA E. SWEET MANAGER OF INTERNAL AUDIT GINA L. EUSTICE CREDIT MANAGER ONAWAY LAURA L. SHACK BANKING OFFICER & BRANCH MANAGER INDIAN RIVER MATTHEW J. KAVANAUGH ASSISTANT VICE PRESIDENT & BRANCH MANAGER PAUL FISHER COMMUNITY ADVISOR LISA RENAUD-LAPRAIRIE COMMUNITY ADVISOR MACKINAW CITY SUSAN M. BRANDT BANKING OFFICER & BRANCH MANAGER DEAN SCHEERENS COMMUNITY ADVISOR JAMES E. TAMLYN COMMUNITY ADVISOR PELLSTON LORA L. CLOUSER BANKING OFFICER & BRANCH MANAGER KELLEY ATKINS COMMUNITY ADVISOR RICHARD CONRAD COMMUNITY ADVISOR ALANSON LORA L. CLOUSER BANKING OFFICER & BRANCH MANAGER 48. CNB CORPORATION OFFICERS, COMMUNITY ADVISORS AND STAFF STAFF OF CITIZENS NATIONAL BANK MAIN OFFICE Eugene Andrzejewski Taryn Bednarz Cheryl Blaskowski Kurt Blaskowski Maghan J. Brooks Patricia K. Comps Arlene Daniel Trisha M. Dobias Nicole Drake Mary E. Greenwood Debra Grice Tonya Hiller Kathy Johnson Stacy King Sherri Kosan Susan Leonardi Betty J. Lewis Loretta Merchant Adam Newman Penny L. Newman Kelli M. Reimann Katherine H. Rhome Ronald D. Rose Carla Roznowski Carolyn A. Scheele Nancy Scott Darren Selden Sandra L. Shawl Lee Sheets David Shotwell Sally A. Spray M. Teresa Sullivan Kathy S. Swackhamer Rebecca Tomaski Joel VanSlembrouck Wendelin K. Whippo Sherry M. Wichlacz DOWNTOWN DRIVE-IN CHEBOYGAN Deanna Hudson Carla Jankoviak EAST SIDE DRIVE-IN CHEBOYGAN Lori Thornton SOUTH BRANCH CHEBOYGAN Karen Barrette Susan D. Bliss Sharon Coppernoll Diane S. Mushlock Diane S. Poirier MACKINAW CITY Deborah L. Closs Jennifer M. LaHaie PELLSTON Sheri L. Kindell Tammy Kirsch ONAWAY Pamela A. Kolasa Sara L. LaLonde Lynn D. Porter Kathleen T. Robbins Kathleen S. Wilson INDIAN RIVER Kelly Comps Julie Davis Amber Perkins Michelle Miller Helen K. Stumpf ALANSON Cheri Diot Jill Hoffman Amanda Nicholson Cathy Ward 49. CNB CORPORATION DIRECTORS AND DIRECTORS EMERITI DIRECTORS OF CNB CORPORATION & CITIZENS NATIONAL BANK VINCENT J. HILLESHEIM Chairman President, Anchor In Marina STEVEN J. BAKER, D.V.M. Retired Indian River Veterinary Clinic JAMES C. CONBOY, JR. Retired former President & Chief Executive Officer, CNB Corporation Retired former President & Chief Executive Officer, Citizens National Bank *Susan A. Eno President & Chief Executive Officer, CNB Corporation President & Chief Executive Officer, Citizens National Bank KATHLEEN M. DARROW President, Darrow Bros. Excavating, Inc. Retired, formerly Group Sales & Special Events Coordinator for the Mackinac State Historic Parks THOMAS J. ELLENBERGER Vice President & Secretary Albert Ellenberger Lumber Company KATHLEEN A. LIEDER Retired Partner, Bodman LLP Co-Owner, Log Mark Bookstore JOHN L. ORMSBEE Owner, Jack's Sales R. JEFFERY SWADLING Vice President, Ken's Village Market FRANCIS J. VANANTWERP, JR. Vice President Durocher Marine Division Kokosing Construction Company, Inc. *Director of Citizens National Bank only DIRECTORS EMERITI LYLE MCKINLEY, THOMAS A. ELLENBERGER, JOHN P. WARD HOW TO ORDER FORM 10-K Shareholders may obtain, without charge, a copy of Form 10-K or the 2007 Annual Report Summary & Highlights by writing Susan A. Eno, Secretary, CNB Corporation, P.O. Box 10, Cheboygan, Michigan 49721. 50. EX-21 3 k25331exv21.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARY OF THE COMPANY: Citizens National Bank of Cheboygan is the sole subsidiary of the Company. CNB Mortgage Corporation, a Michigan corporation, is a wholly-owned subsidiary of Citizens National Bank of Cheboygan. EX-23 4 k25331exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (the CNB Corporation 2004 Employee Stock Purchase Plan) (File No. 114225) and the Registration Statement on Form S-8 (the CNB Corporation 1996 Stock Option Plan) (File No. 333-100250) of our report dated March 28, 2008 relating to the financial statements of CNB Corporation at and for the years ended December 31, 2007, 2006, and 2005, which report is included in Item 13 of the Annual Report on Form 10-K on CNB Corporation. Plante & Moran, PLLC Grand Rapids, Michigan March 28, 2008 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (the CNB Corporation 2004 Employee Stock Purchase Plan) (File No. 114225) and the Registration Statement on Form S-8 (the CNB Corporation 1996 Stock Option Plan) (File No. 333-100250) of our report dated March 30, 2007 relating to the financial statements of CNB Corporation as of December 31, 2006 and for the years ended December 31, 2006, and 2005, which report is included in Item 13 of the Annual Report on Form 10-K on CNB Corporation. Crowe Chizek and Company LLC Grand Rapids, Michigan March 28, 2008 EX-31.1 5 k25331exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Susan A. Eno, President and Chief Executive Officer of CNB Corporation (the "registrant") certify that: 1.) I have reviewed this annual report on Form 10-K of the registrant; 2.) Based on my knowledge, this annual 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 annual report; 3.) Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4.) The registrant's other certifying officer 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 and 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 annual report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures 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 c.) disclosed in this report any change in 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. 5.) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): a.) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to 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. Date: March 27, 2008 /s/ Susan A. Eno ---------------------------------------- Susan A. Eno President and Chief Executive Officer EX-31.2 6 k25331exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Shanna L. Hanley, Treasurer of CNB Corporation (the "registrant") certify that: 1.) I have reviewed this annual report on Form 10-K of the registrant; 2.) Based on my knowledge, this annual 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 annual report; 3.) Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4.) The registrant's other certifying officer 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 and 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 annual report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures 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. c.) disclosed in this report any change in 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 5.) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): a.) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to 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. Date: March 27, 2008 /s/ Shanna L. Hanley ---------------------------------------- Shanna L. Hanley Treasurer (Chief Financial Officer) EX-32.1 7 k25331exv32w1.txt CERTIFICATION 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, to the best of our respective knowledge and belief, that this Annual Report on Form 10-K for the period ended December 31, 2007 ("Report") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that information contained in this Report presents, in all material respects, the financial condition and results of operations of the registrant. /s/ Susan A. Eno ---------------------------------------- Date March 27, 2008 Susan A. Eno President and Chief Executive Officer /s/ Shanna L. Hanley ---------------------------------------- Shanna L. Hanley Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----