Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
Or
o TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ______ to ______
Commission file # 033-00737
CNB CORPORATION
(Exact name of registrant as specified in its charter)
| Michigan | 38-2662386 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
303 North Main Street, Cheboygan MI 49721
(Address of principal executive offices, including Zip Code)
(231) 627-7111
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes x | No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 or the Exchange Act.
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer o | Smaller reporting company x |
| (Do not check if a small reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
| Yes o | No x |
As of August 3, 2012 there were 1,212,098 shares of the issuer’s common stock outstanding.
CNB CORPORATION
Index
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS (CONDENSED)
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 4,056 | $ | 5,446 | ||||
| Interest-bearing deposits with other financial institutions | 14,099 | 10,095 | ||||||
| Total cash and cash equivalents | 18,155 | 15,541 | ||||||
| Time Deposits with other financial institutions | 14,469 | 14,173 | ||||||
| Securities available for sale | 82,156 | 79,086 | ||||||
| Securities held to maturity (market value of $4,456 in 2012 and $5,121 in 2011) | 4,030 | 4,653 | ||||||
| Other securities | 997 | 997 | ||||||
| Loans, held for sale | 1,273 | 1,810 | ||||||
| Loans, net of allowance for loan losses of $3,978 in 2012 and $3,339 in 2011 | 112,924 | 115,094 | ||||||
| Premises and equipment, net | 5,307 | 5,209 | ||||||
| Other assets | 12,915 | 13,579 | ||||||
| Total assets | $ | 252,226 | $ | 250,142 | ||||
| LIABILITIES | ||||||||
| Deposits | ||||||||
| Noninterest-bearing | $ | 54,713 | $ | 49,956 | ||||
| Interest-bearing | 174,664 | 177,987 | ||||||
| Total deposits | 229,377 | 227,943 | ||||||
| Other liabilities | 4,394 | 4,181 | ||||||
| Total liabilities | 233,771 | 232,124 | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock - $2.50 par value; 2,000,000 shares authorized; and 1,212,098 shares issued and outstanding in 2012 and 2011 | 3,030 | 3,030 | ||||||
| Additional paid-in capital | 19,499 | 19,499 | ||||||
| Accumulated deficit | (3,153 | ) | (3,830 | ) | ||||
| Accumulated other comprehensive loss, net of tax | (921 | ) | (681 | ) | ||||
| Total shareholders’ equity | 18,455 | 18,018 | ||||||
| Total liabilities and shareholders’ equity | $ | 252,226 | $ | 250,142 | ||||
See accompanying notes to consolidated financial statements.
| 3 |
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (Unaudited) | ||||||||||||||||
| INTEREST INCOME | ||||||||||||||||
| Loans, including fees | $ | 1,782 | $ | 1,946 | $ | 3,637 | $ | 3,884 | ||||||||
| Securities | ||||||||||||||||
| Taxable | 189 | 268 | 385 | 549 | ||||||||||||
| Tax exempt | 83 | 117 | 169 | 246 | ||||||||||||
| Other interest income | 53 | 49 | 108 | 106 | ||||||||||||
| Total interest income | 2,107 | 2,380 | 4,299 | 4,785 | ||||||||||||
| INTEREST EXPENSE ON DEPOSITS | 271 | 386 | 555 | 792 | ||||||||||||
| NET INTEREST INCOME | 1,836 | 1,994 | 3,744 | 3,993 | ||||||||||||
| Provision for loan losses | 150 | 400 | 860 | 700 | ||||||||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,686 | 1,594 | 2,884 | 3,293 | ||||||||||||
| NONINTEREST INCOME | ||||||||||||||||
| Service charges and fees | 256 | 261 | 488 | 498 | ||||||||||||
| Net realized gains from sales of loans | 178 | 40 | 338 | 67 | ||||||||||||
| Loan servicing fees, net of amortization | (10 | ) | 23 | (8 | ) | 46 | ||||||||||
| Gains on the sale of other real estate owned | — | — | 400 | 23 | ||||||||||||
| Gain on the sale of investment securities | 21 | — | 274 | — | ||||||||||||
| Other income | 109 | 147 | 210 | 251 | ||||||||||||
| Total noninterest income | 554 | 471 | 1,702 | 885 | ||||||||||||
| NONINTEREST EXPENSES | ||||||||||||||||
| Salaries and employee benefits | 1,033 | 1,004 | 2,050 | 1,966 | ||||||||||||
| Deferred compensation | 70 | 63 | 140 | 127 | ||||||||||||
| Occupancy | 238 | 238 | 468 | 502 | ||||||||||||
| Legal and professional | 156 | 201 | 305 | 348 | ||||||||||||
| FDIC Premiums | 90 | 80 | 177 | 219 | ||||||||||||
| ORE losses and carrying costs | (41 | ) | 164 | (10 | ) | 204 | ||||||||||
| Other expenses | 284 | 263 | 558 | 563 | ||||||||||||
| Total noninterest expense | 1,830 | 2,013 | 3,688 | 3,929 | ||||||||||||
| INCOME BEFORE INCOME TAXES | 410 | 52 | 898 | 249 | ||||||||||||
| Income tax expense (benefit) | 98 | (46 | ) | 221 | (33 | ) | ||||||||||
| NET INCOME | $ | 312 | $ | 98 | $ | 677 | $ | 282 | ||||||||
| Unrealized (losses) gains on available for sale | 74 | 250 | 12 | 378 | ||||||||||||
| Reclassification of realized gains, net of tax | (14 | ) | — | (181 | ) | — | ||||||||||
| Unrecognized pension (losses) gains, net of tax | — | — | (70 | ) | — | |||||||||||
| Other comprehensive income, net of tax | 60 | 250 | (239 | ) | 378 | |||||||||||
| TOTAL COMPREHENSIVE INCOME | $ | 372 | $ | 348 | $ | 438 | $ | 660 | ||||||||
| Return on average assets (annualized) | 0.51 | % | 0.16 | % | 0.55 | % | 0.22 | % | ||||||||
| Return on average equity (annualized) | 6.83 | % | 1.86 | % | 7.40 | % | 2.70 | % | ||||||||
| Basic earnings per share | $ | 0.26 | $ | 0.08 | $ | 0.56 | $ | 0.23 | ||||||||
| Diluted earnings per share | $ | 0.26 | $ | 0.08 | $ | 0.56 | $ | 0.23 | ||||||||
| Dividends declared per share | $ | — | $ | — | $ | — | $ | — | ||||||||
See accompanying notes to consolidated financial statements.
| 4 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).
| Six months ended June 30, | ||||||||
| 2012 | 2011 | |||||||
| (Unaudited) | ||||||||
| Cash flows from operating activities | ||||||||
| Net Income | $ | 677 | $ | 282 | ||||
| Adjustments to reconcile net income to net cash from operating activities | ||||||||
| Depreciation, amortization and accretion, net | 112 | 340 | ||||||
| Provision for loan losses | 860 | 700 | ||||||
| Loans originated for sale | (15,859 | ) | (4,461 | ) | ||||
| Proceeds from sales of loans originated for sale | 14,815 | 3,584 | ||||||
| Gain on sales of investment securities | (274 | ) | — | |||||
| Gain on sales of loans | (338 | ) | (67 | ) | ||||
| Proceeds from sales of other real estate owned properties | 944 | — | ||||||
| Gain on sales of other real estate owned properties | (400 | ) | (23 | ) | ||||
| Other real estate owned writedowns/losses | 30 | 142 | ||||||
| (Increase) decrease in deferred tax benefit | 16 | (195 | ) | |||||
| Decrease in other assets | 307 | 895 | ||||||
| Increase in other liabilities | 105 | 62 | ||||||
| Total adjustments | 318 | 977 | ||||||
| Net cash provided by operating activities | 995 | 1,259 | ||||||
| Cash flows from investing activities | ||||||||
| Proceeds from sales of securities available for sale | 12,407 | — | ||||||
| Proceeds from maturities of securities available for sale | 22,430 | 12,682 | ||||||
| Purchase of securities available for sale | (37,820 | ) | (16,712 | ) | ||||
| Proceeds from maturities of securities held to maturity | 1,123 | 1,326 | ||||||
| Purchase of securities held to maturity | (500 | ) | — | |||||
| Proceeds from sales of other securities | — | 2 | ||||||
| Proceeds from maturities of time deposits | 2,002 | 1,812 | ||||||
| Purchase of time deposits | (2,298 | ) | (1,993 | ) | ||||
| Net change in portfolio loans | 3,120 | 1,610 | ||||||
| Premises and equipment expenditures | (279 | ) | (50 | ) | ||||
| Net cash (used in) provided by investing activities | 185 | (1,323 | ) | |||||
| Cash flows from financing activities | ||||||||
| Net increase(decrease) in deposits | 1,434 | (7,565 | ) | |||||
| Net cash (used in) provided by financing activities | 1,434 | (7,565 | ) | |||||
| Net change in cash and cash equivalents | 2,614 | (7,629 | ) | |||||
| Cash and cash equivalents at beginning of year | 15,541 | 22,553 | ||||||
| Cash and cash equivalents at end of period | $ | 18,155 | $ | 14,924 | ||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 558 | $ | 805 | ||||
| Non-cash transactions: | ||||||||
| Transfer from loans to other real estate owned | — | 2,905 | ||||||
See accompanying notes to consolidated financial statements.
| 5 |
Notes to Consolidated Financial Statements
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings involving the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “project,” or similar expressions are intended to identify, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company’s market area, and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as to the date made, and advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
Note 1 – Basis of Presentation
The consolidated financial statements for the three and six months ended June 30, 2012 and 2011 and the year ended December 31, 2011 include the accounts of CNB Corporation (“Company”) and its wholly owned subsidiary, Citizens National Bank of Cheboygan (“Bank”). All significant intercompany accounts and transactions are eliminated in the consolidation process. The statements have been prepared by management without an audit by independent certified public accountants. However, these statements reflect all adjustments (consisting of normal recurring accruals) and disclosures which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and should be read in conjunction with the notes to the consolidated financial statements included in the CNB Corporation’s Form 10-K for the year ended December 31, 2011.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
Because the results of operations are so closely related to and responsive to changes in economic conditions, the results for any interim period are not necessarily indicative of the results that can be expected for the entire year.
Note 2 – New Accounting Standards
None
Note 3 – Securities
The securities portfolio increased $2.4 million since December 31, 2011. The available for sale portfolio increased marginally to 94.2% of the investment portfolio at June 30, 2012 compared to 93.3% December 31, 2011.
| 6 |
The fair values and related unrealized gains and losses for securities available for sale were as follows, in thousands of dollars:
| Gross | Gross | |||||||||||
| Fair | Unrealized | Unrealized | ||||||||||
| Value | Gains | Losses | ||||||||||
| Available for Sale | ||||||||||||
| June 30, 2012 | ||||||||||||
| U.S. Government and agency | $ | 52,675 | $ | 158 | $ | (9 | ) | |||||
| Mortgage-backed securities | 5,723 | 40 | (81 | ) | ||||||||
| Collateralized mortgage obligations | 10,680 | 20 | (3 | ) | ||||||||
| State and municipal | 11,982 | 413 | (7 | ) | ||||||||
| Auction rate securities | 1,000 | — | — | |||||||||
| Preferred Shares | 96 | 74 | — | |||||||||
| $ | 82,156 | $ | 705 | $ | (100 | ) | ||||||
| December 31, 2011 | ||||||||||||
| U.S. Government and agency | $ | 52,915 | $ | 217 | $ | (22 | ) | |||||
| Mortgage-backed securities | 15,168 | 226 | (45 | ) | ||||||||
| State and municipal | 8,914 | 418 | — | |||||||||
| Corporate obligations | 1,009 | 10 | — | |||||||||
| Auction rate securities | 1,000 | — | — | |||||||||
| Preferred Shares | 80 | 58 | — | |||||||||
| $ | 79,086 | $ | 929 | $ | (67 | ) | ||||||
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows, in thousand of dollars:
| Gross | Gross | |||||||||||||||
| Carrying | Unrecognize | Unrecognize | Fair | |||||||||||||
| Amount | Gains | Losses | Value | |||||||||||||
| Held to Maturity | ||||||||||||||||
| June 30, 2012 | ||||||||||||||||
| State and municipal | $ | 4,030 | $ | 426 | $ | — | $ | 4,456 | ||||||||
| December 31, 2011 | ||||||||||||||||
| State and municipal | $ | 4,653 | $ | 477 | $ | (9 | ) | $ | 5,121 | |||||||
| 7 |
The carrying amount and fair value of securities by contractual maturity at June 30, 2012 are shown below, in thousands of dollars.
| Available for sale | Held to Maturity | |||||||||||
| Fair | Carrying | Fair | ||||||||||
| Value | Amount | Value | ||||||||||
| Due in one year or less | $ | 9,998 | $ | 711 | $ | 716 | ||||||
| Due from one to five years | 51,427 | 1,798 | 1,940 | |||||||||
| Due from five to ten years | 2,408 | 1,521 | 1,800 | |||||||||
| Due after ten years | 824 | — | — | |||||||||
| Subtotal | 64,657 | 4,030 | 4,456 | |||||||||
| Mortgage-backed securities | 5,723 | — | — | |||||||||
| Collateralized mortgage obligations | 10,680 | |||||||||||
| Auction Rate Securities | 1,000 | — | — | |||||||||
| Preferred Shares | 96 | — | — | |||||||||
| $ | 82,156 | $ | 4,030 | $ | 4,456 | |||||||
Note 4 – Loans
The table below shows total loans outstanding by type, in thousands of dollars, at June 30, 2012 and December 31, 2011 and their percentages of the total loan portfolio. All loans are domestic.
| June 30, 2012 | December 31, 2011 | |||||||||||||||
| Balance | % of total | Balance | % of total | |||||||||||||
| Portfolio loans: | ||||||||||||||||
| Residential real estate | $ | 57,516 | 49.09 | % | $ | 61,033 | 51.42 | % | ||||||||
| Consumer | 4,978 | 4.25 | % | 5,124 | 4.32 | % | ||||||||||
| Commercial real estate | 49,763 | 42.47 | % | 48,110 | 40.54 | % | ||||||||||
| Commercial | 4,907 | 4.19 | % | 4,411 | 3.72 | % | ||||||||||
| Gross Loans | 117,164 | 100.00 | % | 118,678 | 100.00 | % | ||||||||||
| Deferred loan origination fees, net | (262 | ) | (245 | ) | ||||||||||||
| Allowance for loan losses | (3,978 | ) | (3,339 | ) | ||||||||||||
| Loans, net | $ | 112,924 | $ | 115,094 | ||||||||||||
| 8 |
The following schedule represents the aging analysis of past due loans by loan type reported (in thousands):
| 30-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Loan | Accruing Loans 90 Days or More Days Past Due | |||||||||||||||||||
| June 30, 2012 | ||||||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | 4,907 | $ | 4,907 | $ | — | ||||||||||||
| Commercial Real Estate | 1,575 | — | 1,575 | 48,188 | 49,763 | — | ||||||||||||||||||
| Consumer | 7 | 4 | 11 | 4,967 | 4,978 | 4 | ||||||||||||||||||
| Residential | 662 | 82 | 744 | 56,772 | 57,516 | 82 | ||||||||||||||||||
| Total | $ | 2,244 | $ | 86 | $ | 2,330 | $ | 114,834 | $ | 117,164 | $ | 86 | ||||||||||||
| December 31, 2011 | ||||||||||||||||||||||||
| Commercial | $ | 90 | $ | — | $ | 90 | $ | 4,321 | $ | 4,411 | $ | — | ||||||||||||
| Commercial Real Estate | 126 | — | 126 | 47,984 | 48,110 | — | ||||||||||||||||||
| Consumer | 1 | — | 1 | 5,123 | 5,124 | — | ||||||||||||||||||
| Residential | 844 | — | 844 | 60,189 | 61,033 | — | ||||||||||||||||||
| Total | $ | 1,061 | $ | — | $ | 1,061 | $ | 117,617 | $ | 118,678 | $ | — | ||||||||||||
Asset Quality
The lending staff continues to be well-trained and experienced. During 2011 the Company experienced a continued decrease in the quality of its loan portfolio as a result of persisting deterioration of the Michigan economy and the results of recognizing and working out of problem commercial real estate credits. The Company maintains an acceptable level of asset quality as a result of actively managing delinquencies, nonperforming assets and potential loan problems. The Company performs an ongoing review of all large credits to watch for any deterioration in quality. Nonperforming assets are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or more as to interest or principal payments (but not included in nonaccrual loans in (1) above); (3) other loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (exclusive of loans in (1) or (2) above); (4) and other real estate owned properties. The aggregate amount of nonperforming assets is shown in the table below.
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Nonaccrual | $ | 5,058 | $ | 1,979 | ||||
| Loans past due 90 days or more | 86 | — | ||||||
| Troubled debt restructurings | 3,595 | 4,496 | ||||||
| Other real estate owned | 1,026 | 1,600 | ||||||
| Total nonperforming assets | $ | 9,765 | $ | 8,075 | ||||
| Percent of total assets | 3.87 | % | 3.23 | % | ||||
At June 30, 2012, total nonperforming assets increased by $1.7 million from December 31, 2011. The Bank is closely monitoring and managing nonperforming assets. Nonaccrual loans increased to $5.1 million. Offsetting the increase in nonaccrual loans were decreases in troubled debt restructurings and other real estate owned. Troubled debt restructurings decreased $901,000 while other real estate owned decreased $574,000 from December 31, 2011 to June 30, 2012. Loans past due 90 days and still accruing are loans that management considers to be collectable including accrued interest. Uncertainty in the local economic conditions continues to contribute to the weakness in credit quality.
| 9 |
The Company is in the process of addressing and resolving asset quality issues in the loan portfolio of the Bank. Due to the time involved in this process the Company expects the level of non-performing assets to remain at current levels throughout the remainder of 2012. The Bank believes it is adequately reserved on these loans.
Detail of the loans on nonaccrual status by loan type is presented in the table below:
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| (In thousands) | ||||||||
| Commercial | $ | 9 | $ | 22 | ||||
| Commercial real estate | 4,840 | 1,876 | ||||||
| Consumer | — | — | ||||||
| Residential | 209 | 81 | ||||||
| Total | $ | 5,058 | $ | 1,979 | ||||
Detail of the troubled debt restructuring activity is presented in the table below:
| As of June 30, 2012 and December 31, 2011 | ||||||||||||||||||||||||
| Troubled Debt Restructurings | ||||||||||||||||||||||||
| June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||
| Commercial | — | $ | — | $ | — | — | $ | — | $ | — | ||||||||||||||
| Commercial Real Estate | 6 | $ | 1,164 | $ | 1,164 | 11 | $ | 4,675 | $ | 4,675 | ||||||||||||||
| Consumer | — | $ | — | $ | — | — | $ | — | $ | — | ||||||||||||||
| Residential | 2 | $ | 299 | $ | 299 | 5 | $ | 530 | $ | 530 | ||||||||||||||
| As of June 30, 2012 and December 31, 2011 | |||||||||||||||
| Troubled Debt Restructurings That Subsequently Defaulted | |||||||||||||||
| June 30, 2012 | December 31, 2011 | ||||||||||||||
| Number of Contracts | Recorded Investment |
Number of Contracts | Recorded Investment |
||||||||||||
| Commercial | — | $ | — | — | $ | — | |||||||||
| Commercial Real Estate | — | $ | — | 1 | $ | 135 | |||||||||
| Consumer | — | $ | — | — | $ | — | |||||||||
| Residential | — | $ | — | — | $ | — | |||||||||
The Company uses a seven grade risk rating system to monitor the ongoing credit quality of its commercial loan portfolio. These loan ratings rank the credit quality of a borrower by measuring liquidity, debt capacity, and payment behavior as shown in the borrower’s financial statements. The loan ratings also measure the quality of the borrower’s management and the repayment support offered by any guarantors. A summary of the Company’s loan ratings (or, characteristics of the loans within each rating) follows:
Credit Quality Indicators
Risk Ratings 1-3 (Pass) — All loans in risk ratings 1— 3 are considered to be acceptable credit risks by the Company and are grouped for purposes of allowance for loan loss considerations and financial reporting. The three ratings essentially represent a ranking of loans that are all viewed to be of acceptable credit quality, taking into consideration the various factors mentioned above, but with varying degrees of financial strength, debt coverage, management and factors that could impact credit quality.
Risk Rating 4 (Special Mention) — A special mention business credit has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the Company’s credit position at some future date. Special mention business credits are not adversely ranked and do not expose the Company to sufficient risk to warrant adverse ranking.
Risk Rating 5 (Substandard) — A substandard business credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Business credit classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. If the likelihood of full collection of interest and principal may be in doubt; such loans are placed on nonaccrual status.
Risk Rating 6 (Doubtful) — A business credit rated as doubtful has all the weaknesses inherent in substandard as risk rating 5 with the added characteristic that the weaknesses make collection or liquidation in full, on the basis or currently existing fact, conditions, and values, highly questionable and improbable. Due to the high probability of loss, nonaccrual treatment is required for doubtful rated loans.
Risk Rating 7 (Loss) — A business credit rated as loss is considered uncollectible and of such little value that its continuance as a collectable loan is not warranted. This rating does not necessarily result in absolutely no recovery or salvage value, but rather it is not practical or desirable to defer charging off even if partial recovery may be a consideration in the future.
| 10 |
The following table presents the recorded investment of loans in the commercial loan portfolio by risk rating categories:
| Commercial | Commercial Real Estate | |||||||||||||||||
| June 30, | December 31, | June 30, | December 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||||
| (In thousands) | ||||||||||||||||||
| 1 - 3 | $ | 4,832 | $ | 4,214 | $ | 38,931 | $ | 36,665 | ||||||||||
| 4 | 19 | 30 | 1,562 | 2,633 | ||||||||||||||
| 5 | 47 | 156 | 8,470 | 8,569 | ||||||||||||||
| 6 | 9 | 11 | 800 | 243 | ||||||||||||||
| 7 | — | — | — | — | ||||||||||||||
| Total | $ | 4,907 | $ | 4,411 | $ | 49,763 | $ | 48,110 | ||||||||||
The Company evaluates the credit quality of loans in the residential loan portfolio based primarily on the aging status of the loan, payment activity and credit quality indicators as defined above for business loans. The following schedule presents the recorded investment of loans in the residential loan portfolio based on the credit risk profile of loans in a pass, special mention and substandard rating:
| Residential | ||||||||
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| (In thousands) | ||||||||
| Grade: | ||||||||
| Pass | $ | 56,977 | $ | 60,671 | ||||
| Special mention | — | — | ||||||
| Substandard | 539 | 362 | ||||||
| Total | $ | 57,516 | $ | 61,033 | ||||
The Company evaluates the credit quality of loans in the consumer loan portfolio, based primarily on the aging status of the loan. Accordingly loans past due as to principal or interest 90 days or more are considered in a nonperforming status for purposes of credit quality evaluation. The following schedule presents the recorded investment of loans in the consumer loan portfolio based on the credit risk profile of loans in a performing status and loans in a nonperforming status:
| Consumer | |||||||||
| June 30, | December 31, | ||||||||
| 2012 | 2011 | ||||||||
| (In thousands) | |||||||||
| Performing | $ | 4,974 | $ | 5,124 | |||||
| Nonperforming | 4 | — | |||||||
| Total | $ | 4,978 | $ | 5,124 | |||||
There were thirty-five loans in the loan portfolio that were considered impaired as of June 30, 2012. Twenty-three of the thirty-five loans considered impaired have a valuation allowance against probable losses. There were thirty-one loans that were considered impaired as of year-end 2011. Fifteen of the thirty-one loans considered impaired had a valuation allowance against probable losses.
| 11 |
Impaired loans are presented in the table below (in thousands):
| Unpaid Contractual Principal Balance | Loans With No Allowance | Loans With Allowance | Total Impaired Loans | Related Allowance | Average Impaired Loan Balance | Interest Income Recognized | ||||||||||||||||||||||
| June 30, 2012 | ||||||||||||||||||||||||||||
| Commercial | $ | 68 | $ | — | $ | 35 | $ | 35 | $ | 10 | $ | 61 | $ | 1 | ||||||||||||||
| Commercial Real Estate | 7,061 | 1,985 | 5,076 | 7,061 | 1,906 | 5,980 | 55 | |||||||||||||||||||||
| Residential | 1,126 | 280 | 830 | 1,110 | 133 | 891 | 14 | |||||||||||||||||||||
| Total | $ | 8,255 | $ | 2,265 | $ | 5,941 | $ | 8,206 | $ | 2,049 | $ | 6,932 | $ | 70 | ||||||||||||||
| December 31, 2011 | ||||||||||||||||||||||||||||
| Commercial | $ | 176 | $ | — | $ | 108 | $ | 108 | $ | 82 | $ | 249 | $ | 1 | ||||||||||||||
| Commercial Real Estate | 5,683 | 3,271 | 2,412 | 5,683 | 952 | 4,094 | 79 | |||||||||||||||||||||
| Residential | 786 | 266 | 487 | 753 | 47 | 411 | 21 | |||||||||||||||||||||
| Total | $ | 6,645 | $ | 3,537 | $ | 3,007 | $ | 6,544 | $ | 1,081 | $ | 4,754 | $ | 101 | ||||||||||||||
Impaired loans are evaluated individually for impairment. All other loans are evaluated collectively for impairment.
| 12 |
Note 5 – Allowance for Loan Losses
The following schedule presents, by loan type, the changes in the allowance for the period ending June 30 and details regarding the balance in the allowance and the recorded investment in loans at June 30 by impairment evaluation method (in thousands).
| Commercial | Commercial Real Estate | Consumer | Residential | Unallocated | Total | |||||||||||||||||||
| For the six months ended June 30, 2012 Allowance for credit losses: | ||||||||||||||||||||||||
| Beginning balance | $ | 158 | $ | 2,793 | $ | 35 | $ | 195 | $ | 158 | $ | 3,339 | ||||||||||||
| Charge-offs | (5 | ) | (240 | ) | (16 | ) | (35 | ) | — | $ | (296 | ) | ||||||||||||
| Recoveries | 13 | 41 | 8 | 13 | — | $ | 75 | |||||||||||||||||
| Provision | 94 | 673 | 12 | 79 | 2 | 860 | ||||||||||||||||||
| Ending Balance | $ | 260 | $ | 3,267 | $ | 39 | $ | 252 | $ | 160 | $ | 3,978 | ||||||||||||
| Ending balance: individually evaluated for impairment | $ | 10 | $ | 1,906 | $ | — | $ | 133 | $ | — | $ | 2,049 | ||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 250 | $ | 1,361 | $ | 39 | $ | 119 | $ | 160 | $ | 1,929 | ||||||||||||
| For the six months ended June 30, 2011 Allowance for credit losses: | ||||||||||||||||||||||||
| Beginning balance | $ | 43 | $ | 2,000 | $ | 107 | $ | 186 | $ | 18 | $ | 2,354 | ||||||||||||
| Charge-offs | — | (1,009 | ) | (50 | ) | (71 | ) | — | $ | (1,130 | ) | |||||||||||||
| Recoveries | — | 126 | 12 | 28 | — | $ | 166 | |||||||||||||||||
| Provision | 49 | 558 | 8 | 37 | 48 | 700 | ||||||||||||||||||
| Ending Balance | $ | 92 | $ | 1,675 | $ | 77 | $ | 180 | $ | 66 | $ | 2,090 | ||||||||||||
| Ending balance: individually evaluated for impairment | $ | 77 | $ | 606 | $ | — | $ | 33 | $ | — | $ | 716 | ||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 15 | $ | 1,069 | $ | 77 | $ | 147 | $ | 66 | $ | 1,374 | ||||||||||||
Note 6 – Fair Value Measurements
The following tables present information about the Company’s assets measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011, and the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements required judgment and considers factors specific to each asset or liability.
| 13 |
Disclosures concerning assets measured at fair value are as follows:
Assets and Liabilities
Measured at Fair Value on a Recurring Basis
(dollars in thousands)
| Quoted Prices in Active Markets for Identical
Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance | |||||||||||||
| Assets | ||||||||||||||||
| June 30, 2012 | ||||||||||||||||
| Investment securities-available-for-sale: | ||||||||||||||||
| U.S. Government and agency | $ | — | $ | 52,675 | $ | — | $ | 52,675 | ||||||||
| Mortgage-backed | — | 5,723 | — | 5,723 | ||||||||||||
| Collateralized mortgage obligations | — | 10,680 | — | 10,680 | ||||||||||||
| State and municipal | — | — | 11,982 | 11,982 | ||||||||||||
| Auction rate securities | — | — | 1,000 | 1,000 | ||||||||||||
| Preferred Shares | — | 96 | — | 96 | ||||||||||||
| $ | — | $ | 69,174 | $ | 12,982 | $ | 82,156 | |||||||||
| December 31, 2011 | ||||||||||||||||
| Investment securities-available-for-sale: | ||||||||||||||||
| U.S. Government and agency | $ | — | $ | 52,915 | $ | — | $ | 52,915 | ||||||||
| Mortgage-backed | — | 15,168 | — | 15,168 | ||||||||||||
| State and municipal | — | — | 8,914 | 8,914 | ||||||||||||
| Corporate Obligations | — | 1,009 | — | 1,009 | ||||||||||||
| Auction rate securities | — | — | 1,000 | 1,000 | ||||||||||||
| Preferred Shares | — | 80 | — | 80 | ||||||||||||
| $ | — | $ | 69,172 | $ | 9,914 | $ | 79,086 | |||||||||
Changes in Level 3 Assets
and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)
| Investment securities available-for-sale: | ||||||||
| 2012 | 2011 | |||||||
| Balance at January 1, | $ | 9,914 | $ | 11,527 | ||||
| Total realized and unrealized gains (losses) included in income | — | — | ||||||
| Total unrealized gains (losses) included in other comprehensive income | (11 | ) | 108 | |||||
| Net purchases, sales, calls and maturities | 3,079 | (891 | ) | |||||
| Net transfers in/out of Level 3 | — | — | ||||||
| Balance at June 30, | $ | 12,982 | $ | 10,744 | ||||
Available-for-sale investment securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.
| 14 |
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.
Assets Measured at Fair Value on a Nonrecurring Basis
(dollars in thousands)
| Balance | Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Losses for the Period | ||||||||||||||||
| Assets | ||||||||||||||||||||
| June 30, 2012 | ||||||||||||||||||||
| Impaired loans | $ | 10 | — | — | $ | 10 | $ | — | ||||||||||||
| Other real estate owned | 950 | — | — | 950 | — | |||||||||||||||
| December 31, 2011 | ||||||||||||||||||||
| Impaired loans | $ | 25 | — | — | $ | 25 | $ | (16 | ) | |||||||||||
| Other real estate owned | 1,515 | — | — | 1,515 | (1,006 | ) | ||||||||||||||
| Held to maturity securities | — | — | — | — | (2,011 | ) | ||||||||||||||
Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on using management’s best estimate of key assumptions. These assumptions include future payment ability and estimated realizable values of available collateral (typically based on outside appraisals). The impaired loan losses for the period ending December 31, 2011 represent charge-offs of loan balances written down through the allowance for loan losses. The other real estate owned losses for the period ending December 31, 2011 represent balances written down through the income statement.
Note 7 – Fair Value of Financial Instruments
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
| 15 |
ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis or underlying collateral values, where applicable. The fair value of off-balance sheet items approximates cost and is not considered significant to this presentation.
| 16 |
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Siginificant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
| June 30, 2012 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 18,155 | $ | 18,155 | $ | 18,155 | $ | — | $ | — | ||||||||||
| Time Deposits with other financial institutions | 14,469 | 14,262 | — | 14,262 | — | |||||||||||||||
| Securities available for sale | 82,156 | 82,156 | — | 69,174 | 12,982 | |||||||||||||||
| Securities held to maturity | 4,030 | 4,456 | — | — | 4,456 | |||||||||||||||
| Other securities | 997 | 997 | — | 997 | — | |||||||||||||||
| Loans held for sale | 1,273 | 1,297 | — | 1,297 | — | |||||||||||||||
| Loans, net | 112,924 | 114,402 | — | — | 114,402 | |||||||||||||||
| Accrued interest receivable on loans | 483 | 483 | — | 483 | — | |||||||||||||||
| Liabilities | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Noninterest-bearing | $ | (54,713 | ) | $ | (54,753 | ) | $ | (54,753 | ) | $ | — | $ | — | |||||||
| Interest bearing | (174,664 | ) | (175,028 | ) | (175,028 | ) | — | — | ||||||||||||
| Accrued interest payable on deposits | (32 | ) | (32 | ) | — | (32 | ) | — | ||||||||||||
| December 31, 2011 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 15,541 | $ | 15,541 | $ | 15,541 | $ | — | $ | — | ||||||||||
| Time Deposits with other financial institutions | 14,173 | 13,952 | — | 13,952 | — | |||||||||||||||
| Securities available for sale | 79,086 | 79,086 | 69,172 | 9,914 | ||||||||||||||||
| Securities held to maturity | 4,653 | 5,121 | — | — | 5,121 | |||||||||||||||
| Other securities | 997 | 997 | — | 997 | — | |||||||||||||||
| Loans held for sale | 1,810 | 1,833 | — | 1,833 | — | |||||||||||||||
| Loans, net | 115,094 | 116,918 | — | — | 116,918 | |||||||||||||||
| Accrued interest receivable on loans | 432 | 432 | — | 432 | — | |||||||||||||||
| Liabilities | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Noninterest-bearing | $ | (49,956 | ) | $ | (49,956 | ) | $ | (49,956 | ) | $ | — | $ | — | |||||||
| Interest bearing | (177,987 | ) | (178,407 | ) | (178,407 | ) | — | — | ||||||||||||
| Accrued interest payable on deposits | (35 | ) | (35 | ) | — | (35 | ) | — | ||||||||||||
Note 8 – Stock Options
The Company adopted a stock option plan in May 1996 under which the stock options may be issued at market prices to employees. The plan states that no grant or award shall be made under the plan more than ten years from the date of adoption of the plan and therefore the plan ended in 2006. Stock options were used to reward certain officers and provide them with an additional equity interest. Options were issued for 10 year periods and have varying vesting schedules. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. The Company has a policy of issuing new shares to satisfy option exercises. There were no modification of awards during the periods ended June 30, 2012 and 2011.
Due to the plan end date, there are no options available for grant as of June 30, 2012 and 2011.
| 17 |
Information about options outstanding and options exercisable follows:
| Options Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Balance at January 1, 2012 | 4,462 | $ | 48.57 | |||||||||||||
| Options exercised | — | — | ||||||||||||||
| Options expired | — | — | ||||||||||||||
| Options forfeited | — | — | ||||||||||||||
| Balance at June 30, 2012 | 4,462 | $ | 48.57 | 1.5 years | $ | — | ||||||||||
| Exercisable at June 30, 2012 | 4,462 | $ | 48.57 | |||||||||||||
There were no options exercised during the six months ended June 30, 2012 and 2011 therefore the aggregate intrinsic value of options exercised was $0 for both periods. There were no shares vested for the same periods. Also, there was no cash received or tax benefits realized from option exercises during the same periods.
Note 9 – Earnings Per Share
Basic earnings per share are calculated solely on weighted-average common shares outstanding. Diluted earnings per share will reflect the potential dilution of stock options and other common stock equivalents. For the three and six month periods ending June 30, 2012 and 2011 the weighted average shares outstanding in calculating basic and diluted earnings per share was 1,212,098. As of June 30, 2012 all of the 4,462 outstanding share options were not considered in the earnings per share calculation because they were antidilutive. As of June 30, 2011 there were 10,231 options not considered in the three and six month earnings per share calculations because they were antidilutive.
| 18 |
ITEM 2-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion provides information about the consolidated financial condition and results of operations of CNB Corporation (“Company”) and its wholly owned subsidiary, Citizens National Bank of Cheboygan (“Bank”) for the three and six month periods ending June 30, 2012.
Critical Accounting Policies
Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in fact and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities. The Company’s critical accounting policies are described in the Management Discussion and Analysis section of its 2011 Annual Report. There have been no significant changes in the Company’s critical accounting policies since December 31, 2011.
Financial Condition
As of June 30, 2012 total assets of the company were $252.2 million which represented an increase of $2.1 million or 0.83% from December 31, 2011 assets of $250.1 million. The Company recognized a decrease in the loan portfolio of $2.2 million or 1.9% while deposits increased $1.4 million.
Loans
Net portfolio loans at June 30, 2012 decreased $2.2 million from December 31, 2011. During the first six months of 2012 and over the most recent twelve months total loans has decreased as a result of slowing loan demand, charge-offs and the Company’s effective use of loan sales and servicing to mitigate interest rate risk. The Company generally sells its fixed long-term mortgages on the secondary market. Since December 31, 2011 commercial real estate mortgages have increased $1.7 million while consumer mortgages have decreased $3.5 million. The Company is beginning to see new loan demand and overall total loan growth is expected starting in 2013.
A quarterly review of loan concentrations at June 30, 2012 indicates the pattern of loans in the portfolio has not changed significantly. There is no individual industry with more than a 10% concentration. However, all tourism related businesses, when combined, total 15.3% of total loans.
Allowance and Provision for Loan Losses
The following is a summary of transactions in the allowance for loan losses for the three month period ending June 30, in thousands of dollars:
| Three Months Ended | Six Month Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Beginning balance | $ | 3,804 | $ | 1,845 | $ | 3,339 | $ | 2,354 | ||||||||
| Provision for loan losses | 150 | 400 | 860 | 700 | ||||||||||||
| Charge-offs | (11 | ) | (280 | ) | (296 | ) | (1,130 | ) | ||||||||
| Recoveries | 35 | 125 | 75 | 166 | ||||||||||||
| Ending balance | $ | 3,978 | $ | 2,090 | $ | 3,978 | $ | 2,090 | ||||||||
Management continually monitors its allowance for loan losses and as a result of this monitoring process recorded a loan loss provision of $860,000 for the first six months of 2012 compared to the prior year amount of $700,000 in the first six months of 2011. The amount of provisions for loan losses recognized by the Company is based on management’s evaluation as to the amounts required to maintain an allowance adequate to provide for potential losses inherent in the loan portfolio.
| 19 |
Deposits
As of June 30, 2012 total deposits increased $1.4 million from December 31, 2011. Accompanying the increase was a shift in the deposit mix since December 31, 2011. Noninterest-bearing deposits increased $4.8 million or 9.5% while interest-bearing deposits decreased $3.3 million or 1.9% for the six months ended June 30, 2012.
Liquidity and Capital
The Company maintains an adequate liquidity position in order to respond to extensions of credit, the short-term demand for funds caused by withdrawals from deposit accounts, and for the payment of operating expenses. Maintaining adequate liquidity is accomplished through the management of a combination of liquid assets – those which can be converted into cash – and access to additional sources of funds. If necessary, additional sources of funds include Federal Home Loan Bank advances and Federal Reserve Discount Window availability. Primary liquid assets of the Company are cash and due from banks, federal funds sold, investments held as “available for sale” and maturing loans. The company does not rely on borrowings for sources of liquidity. Liquidity management is both a daily and long-term function of business management. Maturities in the Company’s loan and investment portfolios are monitored regularly to avoid matching short-term deposits with long-term investments and loans. Other assets and liabilities are also monitored to provide the proper balance between liquidity, safety, and profitability. This monitoring process must be continuous due to the constant flow of cash that is inherent in a financial institution.
The Company’s balances of cash and cash equivalents increased $2.6 million or 16.8%. During the six month period ending June 30, 2012, $995,000 in cash was provided by operating activities. Investing activities provided $185,000 during the six months ended June 30, 2012 and financing activities provided $1.4 million.
As of June 30, 2012, the Company had no federal funds sold, $14.1 million in interest-bearing deposits with other financial institutions, $82.2 million in securities available for sale and $711,000 in held to maturity securities maturing within one year. These sources of liquidity are supplemented by new deposits and loan payments received by customers. These short-term assets represent 42.3% of total deposits as of June 30, 2012.
Total equity of the Company at June 30, 2012 was $18.5 million compared to $18.0 million at December 31, 2011. The increase in equity for the six months ended June 30, 2012 includes an increase in retained earnings from net income. This was offset by a decrease in net changes related to accumulated other comprehensive loss.
RESULTS OF OPERATIONS
CNB Corporation’s 2012 net income for the first six months was $677,000, an increase of $395,000 compared to 2011 results. This increase in net income can be attributed for the most part to $400,000 in gains on the sales of other real estate owned and $274,000 in gains on the sale of investment securities compared to no gains in the prior year. Net interest income decreased compared to the same six month period last year due in part to the elevated level of nonaccrual loans and the decreased loan volume. This decrease in net interest income can also be attributed to the current rate environment. While deposit rates have reached near minimum levels, loans and investments continue to reprice at lower levels. The return on assets was 0.55% for the first six months of the year versus 0.22% for the same period in 2011. The return on equity was 7.40% compared to 2.70% for the same period last year. Basic and diluted earnings per share were $0.56 for 2012 compared to $0.23 for 2011.
Net income for the three months ending June 30, 2012 was $312,000 compared to $98,000 for 2011. This was an increase of $214,000. The return on average assets was 0.51% compared to 0.16% for 2011. The return on average equity was 6.83% compared to 1.86% for 2011. This increase in quarterly earnings is primarily due to the decreased in provision expenses for the second quarter 2012 compared to the same quarter last quarter.
| 20 |
Interest income for the first six months of 2012 was $4.3 million, a decrease of $486,000 or 10.2% compared to the 2012 results. This decrease in interest income can be attributed to a continuing low rate environment, increases in the level of nonaccrual loans coupled with increasing loan payoffs. The low interest rates cause customers to refinance their loans to take advantage of the decreased rates which in turn decreases the interest income earned on those loans. The extended low rate environment also causes customers to take money from low yielding savings accounts and use the money to payoff loans thus decreasing total loans outstanding and total interest income. Additional reasons for the decreases in the total loan portfolio are a result of decreasing loan demand, loans being sold to the secondary market, loan charge-offs, and loan balances being transferred to Other Assets as collateral is collected on loans through the foreclosure process.
Interest income for the quarter ending June 30, 2012 was $2.1 million compared to $2.4 million for the same period last year. This decrease is primarily for the same reasons as noted above for the year to date period.
Interest expense for the first six months of 2012 was $555,000, a decrease of $237,000 or 29.9% compared to 2011 results. This decrease can be attributed to the continued low rate environment and change in deposit mix.
Interest expense for the quarter ending June 30, 2012 was $271,000 compared to $386,000 for the same period last year. This decrease is attributed to the same reasons as noted above for the year to date period.
For the first six months of 2012, net interest income was $3.7 million representing a decrease of 6.2% from the same period in 2011. The fully taxable equivalent net interest margin decreased to 3.35% for the six month period ending June 30, 2012 compared to 3.56% for the period ending June 30, 2011. This change can be attributable to the same reasons noted above. The decreasing interest rate environment and nonaccrual loans continue to cause a decrease in interest income on earning assets.
For the first three months of 2012, net interest income was $1.8 million representing a decrease of 7.9% from the same period in 2011.
Year to date net charge-offs recorded in the allowance for loan losses were $221,000 for 2012 compared to $964,000 for the same period in 2011. A provision expense of $860,000 was recorded in the first six months of 2012 compared to $700,000 in the first six months in 2011 in order to maintain an acceptable allowance for loan loss level. The increased provision expense is related to a specific provision allocation for one problem credit. Provision expense is less than current net charge-offs based on management’s analysis of the required level of allowance for loan losses.
Noninterest income for the six months ending June 30, 2012 was $1.7 million, an increase of $817,000 from the same period last year. The increase in noninterest income over the same period last year was due for the most part to a $400,000 gain on the sale of other real estate owned and a $274,000 gain on the sale of investment securities noted above. Also contributing to the increased level of noninterest income were increased gains from the sales of loans due to increased refinancing activity.
Noninterest income for the three month period ending June 30, 2012 was $554,000 compared to $471,000 for the same period last year. This represents an increase of $83,000. This increase is attributable, mostly, to the gains from loan sales as noted above for the six month period.
Noninterest expense for the first six months of 2012 was $3.7 million, a decrease of 6.1% compared to 2011 results. The Bank’s FDIC premiums decreased for the first six months of 2012 compared to the same period last year. In 2010 the FDIC announced a change to the FDIC assessment calculation to base premiums on Bank assets rather than Bank deposits. Along with that change was a decrease in the assessment rates. The change was effective for the 2nd quarter of 2011. The Company continues to monitor and control expenses at all levels. Expenses relating to ORE losses and carrying cost also decreased significantly between the two periods. Management’s strategy in 2011 was to eliminate ORE properties in an effort to reduce the expenses related to their carrying costs.
Noninterest expense for the three month period ending June 30, 2012 was $1.8 million, a decrease of $183,000 or 9.1% compared to 2011 results. This change is primarily due to the reduced costs relating to ORE losses and carrying costs as noted above for the year to date period.
| 21 |
The provision for federal income tax was a tax expense of 24.6% of pretax income for the six months ended June 30, 2012 as compared to a tax benefit of 13.3% for the same period in 2011. A tax benefit was recorded in 2011 due to a significant portion of the Company’s net income before tax being attributable to tax exempt income from life insurance gains and tax exempt securities income. The difference between the effective tax rate and the federal corporate tax rate of 34% is generally due to tax-exempt interest earned on investments and loans and other tax-related items.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary source of market risk for the financial instruments held by the Company is interest rate risk. That is, the risk that a change in market rates will adversely affect the market value of the instruments. Generally, the longer the maturity, the higher the interest rate risk exposure. While maturity information does not necessarily present all aspects of exposure, it may provide an indication of where risks are prevalent.
All financial institutions assume interest rate risk as an integral part of normal operations. Managing and measuring interest rate risk is a dynamic, multi-faceted process that ranges from reducing the exposure of the Company’s net interest margin to swings in interest rates, to assuring sufficient capital and liquidity to support future balance sheet growth. The Company manages interest rate risk through the Asset Liability Committee. The Asset Liability Committee is comprised of bank officers from various disciplines. The Committee reviews policies and establishes rates which lead to prudent investment of resources, the effective management of risks associated with changing interest rates, the maintenance of adequate liquidity, and the earning of an adequate return of shareholders’ equity.
Management believes that there has been no significant changes to the interest rate sensitivity since the presentation in the December 31, 2011 Management Discussion and Analysis appearing in the December 31, 2011 10K.
ITEM 4-CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “Evaluation Date”) an evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Treasurer who serves as our Chief Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Treasurer have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that material information relating to the Company known to others within the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Management’s Annual Report on Internal Controls Over Financial Reporting
The management of CNB Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. CNB Corporation’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of its financial statements.
Management of CNB Corporation assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria.
The December 31, 2011 annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in the annual report.
| 22 |
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 June 30, 2012 that materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.
Limitations of the Effectiveness of Internal Controls
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective, provide only reasonable assurance with respect to financial statement preparation and presentation.
None
Not applicable.
Item 2- Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3-Defaults Upon Senior Securities
None
Item 4-Mine Safety Disclosures
Not Applicable.
None
| 23 |
Item 6-Exhibits and Reports of Form 8-K
| a.) | Exhibits |
| 31.1 | Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer | ||||
| 31.2 | Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer | ||||
| 32.1 | Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer | ||||
| 32.2 | Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer | ||||
| 101 | INS XBRL Instance Document | ||||
| 101 | SCH XBRL Taxonomy Extension Schema Document | ||||
| 101 | CAL XBRL Taxonomy Extension Calculation Document | ||||
| 101 | DEF XBRL Taxonomy Extension Definition Document | ||||
| 101 | LAB XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101 | PRE XBRL Taxonomy Extension Presentation Document | ||||
| b.) | Reports on Form 8-K |
A Current Report on Form 8-K was filed on May 17, 2012 announcing the results of the annual vote of directors and the Board of Directors intent to file for deregistration.
A Current Report on Form 8-K was filed on July 13, 2012 announcing second quarter earnings and reaffirmed the Board of Directors intent to file for deregistration.
| 24 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CNB Corporation | |||
| (Registrant) | |||
| /s/ Susan A. Eno | |||
| Date: August 9, 2012 | Susan A. Eno | ||
| President and Chief Executive Officer | |||
| /s/ Douglas W. Damm | |||
| Date: August 9, 2012 | Douglas W. Damm | ||
| Executive Vice President |
| 25 |
| Number | Exhibit | |
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer | |
| 31.2 | Certification pursuant to Section 302 of he Sarbanes-Oxley Act of 2002 by the Principal Financial Officer | |
| 32.1 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer | |
| 32.2 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer | |
| 101 | INS XBRL Instance Document | |
| 101 | SCH XBRL Taxonomy Extension Schema Document | |
| 101 | CAL XBRL Taxonomy Extension Calculation Document | |
| 101 | DEF XBRL Taxonomy Extension Definition Document | |
| 101 | LAB XBRL Taxonomy Extension Label Linkbase Document | |
| 101 | PRE XBRL Taxonomy Extension Presentation Document |
26