UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~OF ~~the~~THE ~~quarterly~~SECURITIES ~~period~~EXCHANGE ~~ended~~ACT ~~September~~OF ~~30, 2011~~1934

For the quarterly period ended March 31, 2012

o £ TRANSITION REPORT UNDER SECTION 13 OR 15(d) ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

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 incorporation or organization)		(I.R.S. Employer Identification No.)

(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 S 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 xS (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 S

As of ~~November~~May 710, ~~2011~~2012 there were 1,212,~~098shares~~098 shares of the issuer’s common stock outstanding.

CNB CORPORATION

Index

PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements (Condensed):		3
Consolidated Balance Sheets –September30, 2011 and December 31, 2010		3
Consolidated Balance Sheets – March 31, 2012 and December 31, 2011	3
Consolidated Statements of Income–Three and nine Months Ended September 30, 2011 and 2010		4
Consolidated Statements of Income – Three Months Ended March 31, 2012 and 2011	4
Consolidated Statements of Cash Flows - Six Months Ended September 30, 2011 and 2010		5
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011	5
Notes to Consolidated Financial Statements	6 – 17	6
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	18 – 20
Item 3 – Quantitative and Qualitative Disclosures about Market Risk		22
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	21
Item 4 – Controls and Procedures	21	22
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings	22	23
Item 1A – Risk Factors	22	23
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	22	23
Item 3 – Defaults Upon Senior Securities	22	23
Item 4 – (Removed and Reserved)	22	23
Item 5 – Other Information	23	23
Item 6 – Exhibits and Reports on Form 8-K	23	23
Signatures	24	24
Exhibit Index	25	25

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1-FINANCIAL STATEMENTS (CONDENSED)

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

	September 30,			December 31,
	March 31,			December 31,
	2011			2010
	2012			2011
ASSETS	(Unaudited)
Cash and due from banks	$	105,~~101~~755		$	35,~~958~~446
Interest-bearing deposits with other financial institutions		2018,~~802~~186			1810,~~595~~095
Total cash and cash equivalents		3023,~~903~~941			2215,~~553~~541
Time Deposits with other financial institutions		1114,~~511~~054			914,~~626~~173
Securities available for sale		6974,~~324~~076			6679,~~588~~086
Securities held to maturity (market value of $5,946 in 2011 and $8,727 in 2010)		5,489			8,442
Securities held to maturity (market value of $4,995 in 2012 and $5,121 in 2011)		4,578			4,653
Other securities		997			~~999~~997
Loans, held for sale		12,~~468~~602			~~386~~1,810
Loans, net of allowance for loan losses of $2,963 in 2011 and $2,354 in 2010		120,519			128,776
Loans, net of allowance for loan losses of $3,804 in 2012 and $3,339 in 2011		113,293			115,094
Premises and equipment, net		5,~~280~~160			5,~~499~~209
Other real estate owned		2,867			2,180
Other assets		13,425			13,579
Other assets		11,490			10,049
Total assets	$	252,126		$	250,142
Total assets	$	259,848		$	255,098
LIABILITIES
Deposits
Noninterest-bearing	$	5154,~~150~~056		$	4249,~~106~~956
Interest-bearing		~~184~~175,~~556~~572			~~188~~177,~~060~~987
Total deposits		~~235~~229,~~706~~628			~~230~~227,~~166~~943
Other liabilities		4,~~465~~414			4,~~291~~181
Total liabilities		~~240~~234,~~171~~042			~~234~~232,~~457~~124
SHAREHOLDERS’ EQUITY
Common stock - $2.50 par value; 2,000,000 shares authorized; and 1,212,098 shares issued and outstanding in 2011 and 2010		3,030			3,030
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		(23,~~526~~465	)		(13,~~137~~830	)
Accumulated other comprehensive loss, net of tax		(~~326~~980	)		(~~751~~681	)
Total shareholders’ equity		1918,~~677~~084			2018,~~641~~018
Total liabilities and shareholders’ equity	$	~~259~~252,~~848~~126		$	~~255~~250,~~098~~142

See accompanying notes to consolidated financial statements.

Table of Contents

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

	Three months ended						~~Nine months ended~~
	September 30,						September 30,
	March 31,
	2011			2010			2011			2010
	2012			2011
	(Unaudited)						~~(Unaudited)~~
INTEREST INCOME
Loans, including fees	$	1,~~980~~855		$	21,~~101~~938		$	~~5,864~~		$	~~6,567~~
Securities
Taxable		~~235~~196			~~232~~281			~~784~~			~~708~~
Tax exempt		~~110~~86			~~120~~129			~~356~~			~~398~~
Other interest income		5455			6457			~~160~~			~~179~~
Total interest income		2,~~379~~192			2,~~517~~405			~~7,164~~			~~7,852~~
INTEREST EXPENSE ON DEPOSITS		~~356~~284			~~511~~406			~~1,148~~			~~1,640~~
NET INTEREST INCOME		21,~~023~~908			21,~~006~~999			~~6,016~~			~~6,212~~
Provision for loan losses		~~1,275~~710			~~150~~300			~~1,975~~			~~525~~
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		~~748~~1,198			1,~~856~~699			~~4,041~~			~~5,687~~
NONINTEREST INCOME
Service charges and fees		~~276~~232			~~283~~237			~~774~~			~~798~~
Net realized gains from sales of loans		63160			~~120~~27			~~130~~			~~200~~
Loan servicing fees, net of amortization		192			(623	)		65			39
Gains on life insurance proceeds		—			—			—			189
Gain on the sale of other real estate owned		400			—
Gain on the sale of investment securities		—			—			—			5
Gain on the sale of securities		253			—
Other income		~~116~~101			~~119~~127			~~390~~			~~289~~
Total noninterest income		~~474~~1,148			~~516~~414			~~1,359~~			~~1,520~~
NONINTEREST EXPENSES
Salaries and employee benefits		1,~~011~~017			~~1,016~~962			~~2,977~~			~~2,975~~
Deferred compensation		6570			6664			~~192~~			~~174~~
Occupancy		~~247~~230			~~247~~264			~~749~~			~~743~~
Legal and professional		~~195~~149			~~191~~147			~~543~~			~~554~~
FDIC Premiums		97			142			316			404
FDIC premiums		87			139
ORE losses and carrying costs		~~1,460~~31			~~391~~40			~~1,664~~			~~656~~
Securities impairment write-down		470			—			470			—
Other expenses		274			300
Other expenses		264			265			827			746
Total noninterest expense		1,858			1,916
Total noninterest expense		3,809			2,318			7,738			6,252
INCOME BEFORE INCOME TAXES		488			197
INCOME(LOSS) BEFORE INCOME TAXES		(2,587	)		54			(2,338	)		955
Income tax expense		123			13
Income tax expense (benefit)		(916	)		(33	)		(949	)		96
NET INCOME	$	365		$	184
NET INCOME (LOSS)	$	(1,671	)	$	87		$	(1,389	)	$	859
Unrealized (losses) gains on available for sale securities, net of tax		(229	)		128
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(1,624	)	$	159		$	(964	)	$	932
Unrecognized pension (losses) gains, net of tax		(70	)		—
Return on average assets (annualized)		-2.62	%		0.14	%		-0.73	%		0.46	%
Other comprehensive income, net of tax		(299	)		128
Return on average equity (annualized)		-31.69	%		1.64	%		-8.83	%		5.49	%
TOTAL COMPREHENSIVE INCOME	$	66		$	312
Basic earnings (loss) per share	$	-1.38		$	0.07		$	-1.15		$	0.71
Return on average assets (annualized)		0.59	%		0.29	%
Diluted earnings (loss) per share	$	-1.38		$	0.07		$	-1.15		$	0.71
Return on average equity (annualized)		7.97	%		3.55	%
Dividends declared per share	$	—		$	—		$	—		$	—
Basic earnings per share	$	0.30		$	0.15
Diluted earnings per share	$	0.30		$	0.15
Dividends declared per share	$	—		$	—

See accompanying notes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands).

	Nine months ended September 30,
	Three months ended March 31,
	2011			2010
	2012			2011
	(Unaudited)
Cash flows from operating activities
Net Income (loss)	$	(1,389	)	$	859
Net Income	$	365		$	184
Adjustments to reconcile net income (loss) to net cash from operating activities
Adjustments to reconcile net income to net cash
Depreciation, amortization and accretion, net		427			485
from operating activities
Provision for loan losses		1,975			525
Depreciation, amortization and accretion, net		(13	)		130
Loans originated for sale		(8,117	)		(11,501	)
Provision for loan losses		710			300
Proceeds from sales of loans originated for sale		6,729			11,025
Loans originated for sale		(9,101	)		(1,955	)
Losses on impairment of investment securities		470			—
Proceeds from sales of loans originated for sale		6,610			1,516
Gain on sales of loans		(130	)		(200	)
Gain on sales of investment securities		253			—
Gain on sales of other real estate owned properties		(23	)		(5	)
Gain on sales of loans		(160	)		(27	)
Other real estate owned writedowns/losses		1,345			387
Proceeds from sales of other real estate owned properties		700			19
Net gains on sales of investment securities		—			(5	)
Gain on sales of other real estate owned properties		(400	)		—
Increase in deferred tax benefit		(219	)		(167	)
(Increase) decrease in deferred tax benefit		47			(67	)
(Increase) decrease in other assets		(454	)		1,510
Decrease in other assets		10			4
Increase (decrease) in other liabilities		174			(339	)
Increase in other liabilities		127			9
Total adjustments		2(1,~~177~~217	)		~~1,715~~(71	)
Net cash provided by operating activities		788			2,574
Net cash (used in) provided by operating activities		(852	)		113
Cash flows from investing activities
Proceeds from sales of securities available for sale		—11,880			~~420~~—
Proceeds from maturities of securities available for sale		298,~~023~~947			294,~~663~~069
Purchase of securities available for sale		(3116,~~234~~317	)		(3112,~~176~~692	)
Proceeds from maturities of securities held to maturity		~~2,483~~75			~~3,871~~265
Purchase of securities held to maturity		—			(960	)
Proceeds from maturities of time deposits		1,017			878
Proceeds from sales of other securities		2			—
Purchase of time deposits		(898	)		(1,043	)
Proceeds from maturities of time deposits		3,364			1,485
Net change in portfolio loans		2,901			2,811
Purchase of time deposits		(5,249	)		(1,572	)
Premises and equipment expenditures		(38	)		(16	)
Net change in portfolio loans		3,722			11,699
Net cash (used in) provided by investing activities		7,567			(5,728	)
Premises and equipment expenditures		(89	)		(74	)
Net cash provided by investing activities		2,022			13,356
Cash flows from financing activities
Net decrease in deposits		5,540			10,714
Net increase in deposits		1,685			862
Dividends paid		—			(2	)
Net cash provided by financing activities		1,685			862
Purchases of common stock		—			(15	)
Net change in cash and cash equivalents		8,400			(4,753	)
Net cash provided by financing activities		5,540			10,697
Cash and cash equivalents at beginning of year		15,541			22,553
Net change in cash and cash equivalents		8,350			26,627
Cash and cash equivalents at end of period	$	23,941		$	17,800
Cash and cash equivalents at beginning of year		22,553			17,247
Cash and cash equivalents at end of period	$	30,903		$	43,874
Cash paid during the period for:
Interest	$	~~1,171~~283		$	~~1,663~~405
Income taxes		—			—
Non-cash transactions:
Transfer from loans to other real estate owned		~~2,946~~—			12,~~564~~219

See accompanying notes to consolidated financial statements.

Table of Contents

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 ~~September~~the 30three months ended March 31, 2012 and 2011 and the year ended December 31, ~~2010~~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, ~~2010~~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

The FASB has issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to be material.None

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (ASU 2011-02). ASU 2011-02 provides additional clarifying guidance for creditors in determining whether modifications to a loan constitute a concession granted by the creditor; evaluating whether a restructuring results in a delay in payment that is insignificant; and determining whether a debtor is experiencing financial difficulties. ASU 2011-02 also establishes the effective date for certain disclosures about loans modified under troubled debt restructurings that had been delayed by

the FASB’s issuance of ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. For public entities, ASU 2011-02 (including related disclosures) is effective for the first interim or annual period beginning on or after June 15, 2011, with earlyadoption permitted. The adoption of ASU 2011-02 as of July 1, 2011 did not have a material impact on the Company’s consolidated financial condition or results of operations.

As a result of adopting the amendments of ASU 2011-02, the Company reassessed all loan restructurings that occurred on or after January 1, 2011 for identification as a TDR. No new TDRs resulted from this assessment.

FASB ASU 2011-05, Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We anticipate this statement will be adopted with our 2012 annual financial statements.

Note 3 – Securities

The securities portfolio decreased $~~219,000~~5.1 ~~since~~million since December 31, ~~2010~~2011. The available for sale portfolio ~~increased~~decreased marginally to 9193.40% of the investment portfolio at ~~September~~March 3031, 2012 ~~2011~~ compared to 8793.63% at December 31, ~~2010~~2011.

During the third quarter of 2011 an other-than-temporary impairment of $470,000 was recorded through the income statement as a securities impairment write-downs. The impairment is relating to two bonds from the same issuer. The remaining balance of the investments are held in the held to maturity investments on the balance sheet. The Bank is closely monitoring the Bond issuer.6

7Table of Contents

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
September 30, 2011
March 31, 2012
U.S. Government and agency	$	4449,~~486~~017	$	~~257~~106	$	(136	)
Mortgage-backed		126,~~893~~106		~~274~~34		(2665	)
State and municipal		9,797		361		—
Collateralized mortgage obligations		6,829		—		—
Corporate Obligations		1,014		14		—
State and municipal		10,041		419		(5	)
Corporate obligations		1,004		5		—
Auction rate securities		1,000		—		—
Preferred Shares		~~134~~79		~~112~~57		—
	$	6974,~~324~~076	$	~~1,018~~621	$	(27106	)
December 31, 2010
December 31, 2011
U.S. Government and agency	$	3852,~~100~~915	$	~~133~~217	$	(~~123~~22	)
Mortgage-backed		15,~~902~~168		~~139~~226		(2445	)
State and municipal		108,~~527~~914		~~216~~418		~~(32~~—	)
Corporate Obligations		1,023		24		—
Corporate obligations		1,009		10		—
Auction rate securities		1,000		—		—
Preferred Shares		3680		1458		—
	$	6679,~~588~~086	$	~~526~~929	$	(~~179~~67	)

The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows, in ~~thousands~~thousand of dollars:

Gross

Carrying

Unrecognized

Fair

Amount

Gains

Losses

Value

Held to Maturity

September 30, 2011

March 31, 2012

State and municipal

54,~~489~~578

~~457~~417

—

54,~~946~~995

December 31, 2010

December 31, 2011

State and municipal

84,~~442~~653

~~285~~477

—(9

)

85,~~727~~121

~~The carrying amount and fair value of securities by contractual maturity at September 30, 2011 are shown below, in thousands of dollars.~~7

	Available for sale		Held to Maturity
	Fair		Carrying		Fair
	Value		Amount		Value
Due in one year or less	$	14,343	$	374	$	382
Due from one to five years		39,080		3,218		3,352
Due from five to ten years		1,392		1,287		1,491
Due after ten years		482		610		721
Subtotal		55,297		5,489		5,946
Mortgage-backed securities		12,893		—		—
Auction Rate Securities		1,000		—		—
Preferred Shares		134		—		—
	$	69,324	$	5,489	$	5,946

Table of Contents

The carrying amount and fair value of securities by contractual maturity at March 31, 2012 are shown below, in thousands of dollars.

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

Due in one year or less	$	20,489	$	1,210	$	1,215
Due from one to five years		36,408		1,576		1,697
Due from five to ten years		2,201		1,792		2,083
Due after ten years		964		—		—
Subtotal		60,062		4,578		4,995

Mortgage-backed securities		6,106		—		—
Collateralized mortgage obligations		6,829
Auction Rate Securities		1,000		—		—
Preferred Shares		79		—		—

	$	74,076	$	4,578	$	4,995

Note 4 – Loans

The table below shows total loans outstanding by type, in thousands of dollars, at March 31, 2012 and December 31, 2011 and their percentages of the total loan portfolio. All loans are domestic.

	March 31, 2012						December 31, 2011
	Balance			% of total			Balance			% of total
Portfolio loans:
Residential real estate	$	58,849			50.15	%	$	61,033			51.42	%
Consumer		4,542			3.87	%		5,124			4.32	%
Commercial real estate		48,962			41.72	%		48,110			40.54	%
Commercial		4,994			4.26	%		4,411			3.72	%
Gross Loans		117,347			100.00	%		118,678			100.00	%
Deferred loan origination fees, net		(251	)					(245	)
Allowance for loan losses		(3,804	)					(3,339	)
Loans, net	$	113,292					$	115,094

~~The~~Table following schedule summarizes information for both available-for-sale and held-to-maturity investment securities with gross unrealized lossesat September 30, 2011 and December 31, 2010aggregated by category and length of ~~time that individual securities have beenin a continuous unrealized loss position.~~ Contents

September 30, 2011	Less Than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
U.S. Government and agency	$	1,000	$	(1	)	$	—	$	—	$	1,000	$	(1	)
Mortgage-backed		3,335		(26	)		—		—		3,335		(26	)
State and municipal		—		—			626		—		626		—
Corporate obligations		—		—			—		—		—		—
Auction rate securities		—		—			—		—		—		—
Preferred shares		—		—			—		—		—		—
Total temporarily impaired	$	4,335	$	(27	)	$	626	$	—	$	4,961	$	(27	)

The following schedule represents the aging analysis of past due loans by loan type reported (in thousands):

December 31, 2010	Less Than 12 Months					12 Months or More					Total
	30-89 Days Past Due		Greater Than 90 Days			Total Past Due		Current			Total Loan		Accruing Loans 90 Days or More Days Past Due
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2012
	Value		Loss			Value		Loss			Value		Loss
Commercial	$	18	$	—		$	18	$	4,976		$	4,994	$	—
U.S. Government and agency	$	12,865	$	(123	)	$	—	$	—		$	12,865	$	(123	)
Commercial Real Estate		172		—			172		48,790			48,962		—
Mortgage-backed		6,066		(24	)		—		—			6,066		(24	)
Consumer		11		—			11		4,531			4,542		—
State and municipal		2,982		(23	)		626		(9	)		3,608		(32	)
Residential		899		—			899		57,950			58,849		—
Corporate obligations		—		—			—		—			—		—
Total	$	1,100	$	—		$	1,100	$	116,247		$	117,347	$	—
Auction rate securities		—		—			—		—			—		—
December 31, 2011
Preferred shares		—		—			—		—			—		—
Commercial	$	90	$	—		$	90	$	4,321		$	4,411	$	—
Total temporarily impaired	$	21,913	$	(170	)	$	626	$	(9	)	$	22,539	$	(179	)
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	$	—

AnAsset assessment is performed quarterly by the Company to determine whether unrealized losses in its investment securities portfolio are temporary or other-than-temporary by carefully considering all available information.Management did notbelieve any individual unrealized loss on any investment security, as of September 30, 2011, represented an other-than-temporary impairment(OTTI). Management believed that the unrealized losses on investment securities at September 30, 2011 were temporary in nature and due primarilyto changes in interest rates, increased credit spreads and reduced market liquidity and not as a result of credit-related issues.Quality

AtThe ~~September~~lending ~~30,~~staff continues to be well-trained and experienced. During 2011, the Company ~~did~~experienced ~~not~~a ~~have~~continued ~~the~~decrease ~~intent~~in tothe ~~sell~~quality ~~any~~ of its ~~impaired~~loan ~~investment~~portfolio ~~securities~~as ~~and~~a ~~believed~~result of ~~that~~persisting itdeterioration ~~was~~of ~~more-likely-than-not~~the ~~that~~Michigan economy and the ~~Company~~results ~~will~~of ~~not~~recognizing ~~have~~and toworking ~~sell~~out ~~any~~of ~~such~~problem ~~investment~~commercial real ~~securities~~estate ~~before~~credits. aThe ~~full~~Company ~~recovery~~maintains an acceptable level of ~~amortized~~asset ~~cost.~~quality ~~Accordingly,~~as ~~atSeptember~~a ~~30,~~result ~~2011~~of actively managing delinquencies, ~~the~~nonperforming assets and potential loan problems. The Company ~~believed~~performs ~~the~~an ~~impairments~~ongoing inreview ~~its~~of ~~investment~~all ~~securities~~large ~~portfolio~~credits to ~~were~~watch ~~temporary~~for any deterioration in ~~nature~~quality. ~~Impairment~~Nonperforming ~~lossesof~~assets ~~$470,000~~are ~~were~~comprised ~~realized~~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 ~~Company’s~~in ~~consolidated~~(1) ~~statement~~above); (3) other loans whose terms have been renegotiated to provide a reduction or deferral of ~~operations~~interest ~~for~~or principal because of a deterioration in the ~~nine~~financial ~~months~~position ~~ended~~of ~~September~~the ~~30,~~borrower ~~2011.~~(exclusive ~~The~~of ~~Company~~loans ~~does~~in ~~not~~(1) ~~anticipate~~or ~~additional~~(2) ~~investment~~above); ~~impairment~~(4) and ~~losses~~other ~~during~~real ~~2011,~~estate ~~however,~~owned ~~thereis~~properties. noThe ~~assurance~~aggregate ~~that~~amount ~~OTTI~~of ~~may~~nonperforming ~~not~~assets ~~occur~~is shown in the ~~future~~table below.

	March 31,			December 31,
	2012			2011

Nonaccrual	$	5,175		$	1,979
Loans past due 90 days or more		—			—
Troubled debt restructurings		5,666			4,496
Other real estate owned		1,156			1,600
Total nonperforming assets	$	11,997		$	8,075

Percent of total assets		4.76	%		3.23	%

At March 31, 2012, total nonperforming assets increased by $3.9 million from December 31, 2011. The Bank is closely monitoring and managing nonperforming assets. Nonaccrual loans increased to $3.2 million and troubled debt restructurings increased $1.2 million since December 31, 2011. Offsetting the increase in nonaccrual loans and troubled debt restructurings was a decrease to other real estate owned. Other real estate owned decreased $444,000 from December 31, 2011 to March 31, 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.

~~Note~~Table 4of ~~– Loans~~Contents

~~The~~Because ~~table~~of ~~below~~the ~~shows~~continuing ~~total~~efforts ~~loans~~to ~~outstanding~~identify byand ~~type,~~analyze inthe overall ~~thousands~~amount of ~~dollars,~~credit atrisk ~~September~~in ~~30,~~the ~~2011~~Company’s ~~and~~loan ~~December 31~~portfolio, ~~2010~~the ~~and~~Company ~~their~~expects ~~percentages~~the level of non-performing assets to remain at current levels throughout the ~~total~~remainder ~~loan~~of ~~portfolio~~2012. ~~All~~The ~~loans~~Bank ~~are~~believes ~~domestic~~it is adequately reserved on these loans.

	September 30, 2011						December 31, 2010
	Balance			% of total			Balance			% of total
Portfolio loans:
Residential real estate	$	63,970			51.71	%	$	67,309			51.24	%
Consumer		5,303			4.28	%		6,016			4.58	%
Commercial real estate		49,992			40.41	%		52,654			40.09	%
Commercial		4,451			3.60	%		5,375			4.09	%
Gross Loans		123,716			100.00	%		131,354			100.00	%
Deferred loan origination fees, net		(234	)					(224	)
Allowance for loan losses		(2,963	)					(2,354	)
Loans, net	$	120,519					$	128,776

Detail of the loans on nonaccrual status by loan type is presented in the table below:

Net portfolio loans at September 30, 2011 decreased $8.3 million from December 31, 2010. During the first nine months of 2011 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, 2010 commercial real estate mortgages have decreased $2.7 million while consumer mortgages have decreased $3.3 million. This decrease in commercial real estate mortgage loans is primarily due to the foreclosure of a few large commercial mortgage loans. The foreclosure process transfers the loan balance from a commercial mortgage loan to other real estate owned. Minimal loan demand is expected to continue and overall total loan growth is not expected in 2011.

	March 31,		December 31,
	2012		2011
	(In thousands)
Commercial	$	12	$	22
Commercial real estate		4,949		1,876
Consumer		—		—
Residential		213		81
Total	$	5,174	$	1,979

A quarterly review of loan concentrations at September 30, 2011 indicates the pattern of loans in the portfolio has not changed significantly. There is no individual industry with more than a 10% concentration. However, all tourism related businesses, when combined, total 14.6% of total loans. For purposes of this definition, tourism related businesses includes loans to motels, hotels, restaurants, novelty & gift shops, golf course, marine and campgrounds.

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.

Table of Contents

The following table presents the recorded investment of loans in the commercial loan portfolio by risk rating categories:

	Commercial				Commercial Real Estate
	September 30,		December 31,		September 30,		December 31,
	March 31,		December 31,		March 31,		December 31,
	2011		2010		2011		2010
	2012		2011		2012		2011
	(In thousands)
1	$	216	$	18	$	1,021	$	148
1 - 3	$	4,910	$	4,214	$	38,005	$	36,665
2		1,828		1,334		5,492		5,166
4		21		30		1,576		2,633
3		2,210		3,318		31,171		28,903
5		53		156		8,581		8,569
4		19		35		3,956		4,582
6		10		11		800		243
5		166		670		8,352		13,855
6		12		—		—		—
7		—		—		—		—
Total	$	4,~~451~~994	$	54,~~375~~411	$	4948,~~992~~962	$	5248,~~654~~110

The Company evaluates the credit quality of loans in the residential loan portfolio based primarily on the aging status of the loan, ~~and~~ 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
	September 30,		December 31,
	March 31,		December 31,
	2011		2010
	2012		2011
	(In thousands)
Grade:
Pass	$	6258,~~986~~288	$	6660,~~884~~671
Special mention		~~117~~—		—
Substandard		~~867~~561		~~425~~362
Total	$	6358,~~970~~849	$	6761,~~309~~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
	September 30,		December 31,
	March 31,		December 31,
	2011		2010
	2012		2011
	(In thousands)
Performing	$	54,~~303~~542	$	65,~~008~~124
Nonperforming		—		8—
Total	$	54,~~303~~542	$	65,~~016~~124

There were thirty-five loans in the loan portfolio that were considered impaired as of March 31, 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.

~~Note~~Table 5of ~~– Allowance for Loan Losses~~Contents

~~The~~Impaired ~~following~~loans isare apresented ~~summary of transactions~~ in the ~~allowance~~table ~~for~~below ~~loan losses for the three and nine month periods ending September 30,~~ (in thousands ~~of dollars~~):

	Three Months Ended						Nine Month Ended
	Unpaid Contractual Principal Balance			Loans With No Allowance			Loans With Allowance			Total Impaired Loans			Related Allowance		Average Impaired Loan Balance		Interest Income Recognized
	September 30,						September 30,
March 31, 2012
	2011			2010			2011			2010
Commercial	$	86		$	2		$	37		$	39		$	12	$	74	$	1
Beginning balance	$	2,090		$	1,214		$	2,354		$	2,863
Commercial Real Estate		7,181			2,001			5,180			7,181			1,885		6,432		35
Provision for loan losses		1,275			150			1,975			525
Residential		1,106			286			804			1,090			106		922		11
Charge-offs		(449	)		(234	)		(1,579	)		(2,365	)
Total	$	8,373		$	2,289		$	6,021		$	8,310		$	2,003	$	7,428	$	47
Recoveries		47			18			213			125
December 31, 2011
Ending balance	$	2,963		$	1,148		$	2,963		$	1,148
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.

~~The~~Table ~~following~~of 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 September 30 by impairment evaluation method (in thousands).Contents

	Commercial			Commercial Real Estate			Consumer			Residential			Unallocated		Total
For the nine months ended September 30, 2011
Allowance for credit losses:
Beginning balance	$	43		$	2,000		$	107		$	186		$	18	$	2,354
Charge-offs		(436	)		(1,009	)		(23	)		(110	)		—	$	(1,578	)
Recoveries		3			164			16			30			—	$	213
Provision		462			1,487			(51	)		35			41		1,974
Ending Balance	$	72		$	2,642		$	49		$	141		$	59	$	2,963
Ending balance: individually evaluated for impairment	$	12		$	1,270		$	—		$	3		$	—	$	1,285
Ending balance: collectively evaluated for impairment	$	60		$	1,372		$	49		$	138		$	59	$	1,678
For the nine months ended September 30, 2010
Allowance for credit losses:
Beginning balance	$	116		$	2,277		$	107		$	343		$	20	$	2,863
Charge-offs		(305	)		(1,897	)		(95	)		(68	)		—	$	(2,365	)
Recoveries		8			41			25			51			—	$	125
Provision		291			229			75			(198	)		128	$	525
Ending Balance	$	110		$	650		$	112		$	128		$	148	$	1,148
Ending balance: individually evaluated for impairment	$	97		$	207		$	—		$	—		$	—	$	304
Ending balance: collectively evaluated for impairment	$	13		$	443		$	112		$	128		$	148	$	844

Note 5 – Allowance for Loan Losses

~~Net~~The ~~charge-offs~~following ~~for~~schedule ~~the~~presents, ~~year~~by toloan ~~date~~type, ~~period~~the ~~totaled~~changes ~~$1.4~~in the ~~million~~allowance asfor ofthe ~~September~~period ~~30,~~ending ~~2011~~March ~~compared~~31 toand ~~$2.2million~~details atregarding ~~September~~the ~~30,~~balance ~~2010.~~in ~~The~~the ~~majority~~allowance ofand the ~~net~~recorded ~~charge~~investment ~~offs from 2010 was related to 5~~ in loans; ~~all~~at 5March ~~loans~~31 ~~had~~by aimpairment ~~specific~~evaluation ~~allocation~~method (in ~~the allowance for loan losses prior to being charged off~~thousands).

The balance of the allowance for loan loss at September 30, 2011 is $3.0 million compared to $1.1 million at September 30, 2010. Management performs an analysis of the adequacy of the allowance on a regular basis. Based on the most recent analysis, management believes the current level to be adequate to provide for potential losses.

	Commercial			Commercial Real Estate			Consumer			Residential			Unallocated			Total
For the three months ended March 31, 2012
Allowance for credit losses:

Beginning balance	$	158		$	2,793		$	35		$	195		$	158		$	3,339
Charge-offs		(5	)		(240	)		(5	)		(35	)		—		$	(285	)
Recoveries		—			26			4			10			—		$	40
Provision		107			652			(2	)		71			(118	)		710
Ending Balance	$	260		$	3,231		$	32		$	241		$	40		$	3,804

Ending balance: individually evaluated for impairment	$	12		$	1,885		$	—		$	106		$	—		$	2,003

Ending balance: collectively evaluated for impairment	$	248		$	1,346		$	32		$	135		$	40		$	1,801

For the three months ended March 31, 2011
Allowance for credit losses:

Beginning balance	$	43		$	2,000		$	107		$	186		$	18		$	2,354
Charge-offs		—			(840	)		(7	)		(2	)		—		$	(849	)
Recoveries		—			32			7			1			—		$	40
Provision		16			95			(19	)		38			170			300
Ending Balance	$	59		$	1,287		$	88		$	223		$	188		$	1,845

Ending balance: individually evaluated for impairment	$	—		$	965		$	—		$	15		$	—		$	980

Ending balance: collectively evaluated for impairment	$	59		$	322		$	88		$	208		$	188		$	865

Management continually monitors its allowance for loan losses and as a result of this monitoring process recorded a loan loss provision of $2.0 million for the first nine months of 2011 compared to the prior year amount of $525,000 in the first nine months of 2010. The amount of provision for loan losses recognized by the Company is based on management’s evaluation as to the amount required to maintain an allowance adequate to provide for potential losses inherent in the loan portfolio.

Note 6 – Fair Value Measurements

The following tables present information about the Company’s assets ~~assetsmeasured~~measured at fair value on a recurring basis at ~~September~~March 3031, 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.

Table of Contents

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements required judgment and considers factors specific to each asset or liability.

Disclosures concerning assets measured at fair value are as follows:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
Assets
September 30, 2011
Investment securities-available-for-sale:
U.S. Government and agency	$	44,486	$	—	$	—	$	44,486
Mortgage-backed		12,893		—		—		12,893
State and municipal		—		—		9,797		9,797
Corporate Obligations		1,014		—		—		1,014
Auction rate securities		—		—		1,000		1,000
Preferred Shares		134		—		—		134
	$	58,527	$	—	$	10,797	$	69,324
December 31, 2010
Investment securities-available-for-sale:
U.S. Government and agency	$	38,100	$	—	$	—	$	38,100
Mortgage—backed		15,902		—		—		15,902
State and municipal		—		—		10,527		10,527
Corporate Obligations		1,023		—		—		1,023
Auction rate securities		—		—		1,000		1,000
Preferred Shares		36		—		—		36
	$	55,061	$	—	$	11,527	$	66,588

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
March 31, 2012
Investment securities-available-for-sale:
U.S. Government and agency	$	—	$	49,017	$	—	$	49,017
Mortgage-backed		—		6,106		—		6,106
Collateralized mortgage obligations		—		6,829		—		6,829
State and municipal		—		—		10,041		10,041
Corporate Obligations		—		1,004		—		1,004
Auction rate securities		—		—		1,000		1,000
Preferred Shares		—		79		—		79
	$	—	$	63,035	$	11,041	$	74,076

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		(4	)		44
Net purchases, sales, calls and maturities		1,131			(186	)
Net transfers in/out of Level 3		—			—
Balance at March 31,	$	11,041		$	11,385

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

	Investment securities available-for-sale:
	September 30,			December 31,
	2011			2010
Balance at January 1,	$	11,527		$	8,836
Total realized and unrealized gains (losses) included in income		—			—
Total unrealized gains (losses) included in other comprehensive income		176			(80	)
Net purchases, sales, calls and maturities		(906	)		2,771
Net transfers in/out of Level 3		—			—
	$	10,797		$	11,527

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.

~~Available-for-sale~~Both ~~investment~~observable ~~securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities~~ and anunobservable ~~auction~~inputs ~~rate~~may ~~security~~be ~~which~~used ~~has~~to ~~no recent trades. The Company estimates~~ determine the fair value of ~~these~~positions ~~assets~~classified ~~based~~as onLevel ~~the~~3 ~~present~~assets ~~value~~and ofliabilities. ~~expected~~As ~~future~~a ~~cash~~result, ~~flows~~the ~~using~~unrealized ~~management’s~~gains ~~best~~and ~~estimate~~losses offor ~~key~~these assets ~~assumptions,~~presented ~~including~~in ~~forecasted~~the ~~interest~~tables ~~yield~~above ~~and~~may ~~payment~~include ~~rates,~~changes ~~credit~~in ~~quality~~fair ~~and~~value athat ~~discount~~were ~~rate~~attributable ~~commensurate~~to ~~with~~both ~~the~~observable ~~current market~~ and ~~other risks involved~~unobservable inputs.

~~Both~~Assets ~~observable~~Measured ~~and~~at ~~unobservable~~Fair ~~inputs~~Value ~~may~~on ~~be used to determine the fair value of positions classified as Level 3 assets and liabilities. As~~ a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.Nonrecurring Basis

~~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
September 30, 2011
March 31, 2012
Impaired loans	$	3613		—		—	$	3613	$	~~(16~~	)
Other real estate owned		21,~~826~~080		—		—		21,~~826~~080		~~(1,079~~	)
December 31, 2010
December 31, 2011
Impaired loans	$	~~2,343~~25		—		—	$	~~2,343~~25	$	~~(890~~	)
Other real estate owned		~~978~~1,515		—		—		~~978~~1,515		~~(346~~	)

~~Loans~~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 ~~loanlosses~~loan losses for the period ending ~~September~~March 3031, 2012 and December 31, 2011 represents charge-offs of loan balances written down through the allowance for loan losses. The other real estate owned losses for the period ending March 31, 2012 and December 31, 2011 represents balances written down through the income statement.

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

Note 7 – Fair Value of Financial Instruments

~~The~~ASC ~~following~~Topic ~~methods~~820 ~~and~~defines ~~assumptions~~fair ~~were~~value ~~used~~as tothe ~~estimate~~price ~~fair~~that ~~values~~would be ~~for~~received ~~financial~~to ~~instruments.~~sell ~~The~~an ~~carrying~~asset ~~amount~~or ispaid ~~considered~~ to ~~estimate~~transfer ~~fair~~a ~~value~~liability ~~for~~in ~~cash~~an ~~and~~orderly ~~variable~~transaction ~~rate~~between ~~loans~~market orparticipants. ~~deposits~~A fair value measurement assumes that ~~reprice~~the ~~frequently~~transaction ~~and~~to ~~fully.~~sell ~~Securities~~the ~~fair~~asset ~~values~~or ~~are~~transfer ~~based~~the onliability ~~quoted~~occurs in the principal market ~~prices~~for the asset or liability or, ifin nothe ~~quotes~~absence ~~are~~of ~~available~~a principal market, onthe most advantageous market for the ~~rate~~asset ~~and~~or ~~term~~liability. ofThe price in the ~~security~~principal ~~and~~(or onmost ~~information~~advantageous) ~~about~~market used to measure the ~~issuer.~~fair ~~For~~value ~~fixed~~of ~~rate~~the ~~loans~~asset or ~~deposits~~liability ~~and~~shall not be adjusted for ~~variable~~transaction ~~loans~~costs. orAn ~~deposits~~orderly ~~with~~transaction ~~infrequent~~is ~~repricing~~a ortransaction ~~repricing~~that ~~limits,~~assumes ~~the~~exposure ~~fair~~to ~~value~~the ismarket ~~estimated~~for bya ~~discounted~~period prior ~~cash~~to ~~flow~~the ~~analysis~~measurement ordate ~~underlying~~to ~~collateral~~allow ~~values,~~for ~~where~~marketing ~~applicable.~~activities ~~The~~that ~~fair~~are ~~value~~usual ofand ~~off-balance~~customary ~~sheet~~for ~~items~~transactions ~~approximates~~involving ~~cost~~such assets and liabilities; it is not ~~considered~~a ~~significant~~forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to ~~this~~transact ~~presentation~~and (iv) willing to transact.

~~The~~Table ~~estimated values~~ of ~~financial instruments were:~~ Contents

	September 30, 2011						December 31, 2010
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
	(In thousands)
Assets
Cash and cash equivalents	$	30,903		$	30,903		$	22,553		$	22,553
Time Deposits with other financial institutions		11,511			11,511			9,626			9,626
Securities available for sale		69,324			69,324			66,588			66,588
Securities held to maturity		5,489			5,946			8,442			8,727
Other securities		997			997			999			999
Loans held for sale		1,468			1,489			386			392
Loans, net		120,519			122,730			128,776			130,286
Accrued interest receivable on loans		375			375			433			433
Liabilities
Deposits:
Noninterest-bearing	$	(51,150	)	$	(51,150	)	$	(42,106	)	$	(42,106	)
Interest bearing		(184,556	)		(184,944	)		(188,060	)		(188,329	)
Accrued interest payable on deposits		(36	)		(36	)		(59	)		(59	)

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:

~~Note~~In 8general, –fair ~~Stock~~values ~~Options~~determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the company has the ability to access.

~~The~~Fair ~~Company~~values ~~adopted~~determined aby ~~stock~~Level ~~option~~2 ~~plan~~inputs inuse ~~May~~other ~~1996~~inputs ~~under~~that are ~~which~~observable, ~~the~~either ~~stock~~directly ~~options~~or ~~may be issued at market prices to employees~~indirectly. ~~The~~These ~~plan~~Level ~~states~~2 ~~that~~inputs noinclude ~~grant~~quoted orprices ~~award~~for ~~shall~~similar beassets ~~made under the plan more than ten years from the date of adoption of the plan~~ and ~~therefore~~liabilities ~~the plan ended~~ in active ~~2006.~~markets, ~~Stock options were used to reward certain officers~~ and ~~provide~~other ~~them~~inputs ~~with~~such anas ~~additional equity~~ interest. ~~Options~~rates ~~were issued for 10 year periods~~ and ~~have~~yield ~~varying~~curves ~~vesting~~that ~~schedules.~~are ~~The~~observable ~~exercise price of options granted is equivalent to the market value of underlying stock~~ at ~~the~~commonly ~~grant~~quoted ~~date~~intervals. ~~The Company has a policy of issuing new shares to satisfy option exercises. There were no modification of awards during the periods ended September 30, 2011 and 2010.~~

~~Due~~Level to3 ~~the~~inputs ~~plan~~are ~~end~~unobservable ~~date~~inputs, ~~there~~including inputs that are noavailable ~~options~~in ~~available~~situations ~~for~~where ~~grant~~there asis oflittle, ~~September~~if 30any, ~~2011~~market ~~and~~activity ~~2010~~for the related asset or liability.

~~Information~~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 ~~options~~the ~~outstanding~~issuer. For fixed rate loans or deposits and ~~options~~for ~~exercisable~~variable ~~follows:~~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.

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Options		Exercise		Contractual	Intrinsic
	Outstanding		Price		Term	Value
Balance at January 1, 2011		4,462	$	48.57
Options exercised		—		—
Options expired		—		—
Options forfeited		—		—
Balance at September 30, 2011		4,462	$	48.57	2.2 years	$	—
Exercisable at September30, 2011		4,462	$	48.57

~~There~~Table ~~were no options exercised during the nine months ended September 30, 2011 and 2010 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~~Contents

~~There~~The ~~have~~following ~~been~~table nosummarizes ~~significant~~financial ~~changes~~assets inand ~~the~~financial liabilities ~~Company’s~~measured ~~critical~~at ~~accounting~~fair ~~policies~~value ~~since~~on ~~December~~a recurring basis as of March 31, ~~2010.~~2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Note 9 – Earnings Per Share

	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)
March 31, 2012	(In thousands)
Assets
Cash and cash equivalents	$	23,941		$	23,941		$	23,941		$	—		$	—
Time Deposits with other financial institutions		14,054			14,262			—			14,262			—
Securities available for sale		74,076			74,076			—			63,035			11,041
Securities held to maturity		4,578			4,995			—			—			4,995
Other securities		997			997			997			—			—
Loans held for sale		2,602			2,633			—			2,633			—
Loans, net		113,293			114,838			—			—			114,838
Accrued interest receivable on loans		466			466			—			—			466
Liabilities
Deposits:
Noninterest-bearing	$	(54,056	)	$	(54,056	)	$	(54,056	)	$	(54,056	)	$	—
Interest bearing		(175,572	)		(175,975	)		(175,975	)		(175,975	)		—
Accrued interest payable on deposits		(36	)		(36	)		—			—			(36	)

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	)	$	(49,956	)	$	—
Interest bearing		(177,987	)		(178,407	)		(178,407	)		(178,407	)		—
Accrued interest payable on deposits		(35	)		(35	)		—			—			(35	)

~~Basic~~Note ~~earnings~~8 ~~per share are calculated solely on weighted~~-~~average~~ ~~common~~Stock shares outstanding. Diluted earnings per share will reflect the potential dilution of stock options and other common stock equivalents.For the three and nine month periods ending September 30, 2011 the weighted average shares outstanding in calculating basic and diluted earnings per share were 1,212,098. For the three and nine month periods ending September 30, 2010 the weighted average shares outstanding in calculating basic and diluted earnings per share were 1,212,098 and 1,212,900. As of September 30, 2011 and 2010 there were 4,462 options not considered in the three and nine month earnings per share calculations because they were antidilutive.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 March 31, 2012 and 2011.

Due to the plan end date, there are no options available for grant as of March 31, 2012 and 2011.

Table of Contents

Information about options outstanding and options exercisable follows:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Options		Exercise		Contractual		Intrinsic
	Outstanding		Price		Term		Value

Balance at January 1, 2012		4,462	$	48.57
Options exercised		—		—
Options expired		—		—
Options forfeited		—		—
Balance at March 31, 2012		4,462	$	48.57		1.7 years	$	—

Exercisable at March 31, 2012		4,462	$	48.57

There were no options exercised during the three months ended March 31, 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

There have been no significant changes in the Company’s critical accounting policies since December 31, 2011.

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 month period ending March 31, 2012 and 2011 the weighted average shares outstanding in calculating basic and diluted earnings per share was 1,212,098. As of March 31, 2012 all of the 4,462 outstanding share options were not considered in the earnings per share calculation because they were antidilutive.

Table of Contents

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 ~~six~~three month period ending ~~September~~March 3031, ~~2011~~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 ~~2010~~2011 Annual Report.

Financial Condition

As of ~~September~~March 3031, ~~2011~~2012 total assets of the company were $~~259~~252.8 1 million which ~~represents~~represented an increase of $42.80 million or 10.979% from December 31, ~~2010~~2011 assets of $250.1 million. The Company recognized a ~~adecrease~~decrease in the ~~net~~ loan portfolio of $81.3 million or 61.41% while deposits ~~decreased~~increased $51.57 million.

~~Credit Quality~~Loans

~~The~~Net ~~Company has experienced a decrease in the quality of its loan~~ portfolio inloans ~~recent~~at ~~years~~March as31, a2012 ~~result~~decreased ~~of persisting strain on the Michigan economy and the results of recognizing and working out of problem commercial real estate credits~~$1.8 million ~~Since~~from December 31, ~~2010~~2011. During the ~~Company~~first ~~has~~three ~~experienced~~months ~~improvements~~of in2012 ~~the delinquencies, non accruals~~ and ~~substandard~~over ~~assets.The~~the ~~Company~~most ~~maintains~~recent antwelve ~~acceptable~~months ~~level~~total ofloans ~~asset~~has decreased ~~quality~~ as a result of ~~actively~~slowing ~~managing~~loan ~~delinquencies~~demand, ~~nonperforming~~charge-offs ~~assets,~~ and ~~potential~~the ~~loan problems. The~~ Company’s ~~performs~~effective anuse ~~ongoing review~~ of ~~all~~loan ~~large~~sales ~~credits~~and servicing to ~~watch~~mitigate ~~for~~interest ~~any~~rate ~~deterioration in quality~~risk. ~~Nonperforming~~The ~~assets~~Company ~~are~~generally ~~comprised~~sells ~~of:~~its ~~(1)~~fixed ~~loans~~long-term ~~accounted~~mortgages ~~for~~ on athe ~~nonaccrual~~secondary ~~basis;~~market. ~~(2)~~Since December ~~loans~~31, ~~contractually~~2011 ~~past~~commercial ~~due~~real 90estate ~~days~~mortgages orhave ~~more~~increased as$852,000 towhile ~~interest~~consumer ormortgages ~~principal~~have ~~payments~~decreased ~~(but~~$2.2 million. ~~not~~The ~~included~~Company inis ~~nonaccrual~~beginning ~~loans in (1) above); (3) other loans whose terms have been renegotiated~~ to ~~provide~~see anew ~~reduction~~loan ordemand ~~deferral of interest or principal because of a deterioration in the financial position of the borrower (exclusive of loans in (1) or (2) above);~~ and ~~(4)~~overall ~~other~~total ~~real~~loan ~~estate~~growth ~~owned properties . The aggregate amount of nonperforming assets~~ is ~~shown~~expected in ~~the table below~~2012.

17A quarterly review of loan concentrations at March 31, 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 14.9% of total loans.

	September 30,			December 31,
	2011			2010
Nonaccrual loans	$	3,429		$	6,892
Nonaccrual investments		2,466			—
Loans past due 90 days or more		—			99
Troubled debt restructurings		4,195			233
Other real estate owned		2,867			2,180
Total nonperforming assets	$	12,957		$	9,404
Percent of total assets		4.99	%		3.69	%

Allowance and Provision for Loan Losses

~~At September 30, 2011, total nonperforming assets increased by $3.6 million from December 31, 2010.~~ The ~~overall~~following ~~increase in nonperforming assets~~ is due to the $4.0 million increase in loans identified as troubled debt restructurings. Nonaccrual loans decreased $3.5 million. The overall decrease in nonaccrual loans is due to the final resolution of a ~~large~~summary ~~volume~~ of ~~problem~~transactions ~~loans combine with no identification of additional problem loans. Final resolution of nonperforming loans has come~~ in the ~~form~~allowance for of loan ~~charge-offs~~losses ~~and~~for transfers to other real estate owned. Included in nonperforming assets as of September 30, 2011 is $2.5 million attributable to an investment that is considered to be impaired. The bond issuer has notified the ~~Bank~~three ~~that~~month itperiod ~~will~~ending noMarch ~~longer be making principal and interest payments effective November 1~~31, ~~2011.~~in Anthousands ~~other-than-temporary impairment~~ of $470,000 has been recorded through the income statement for the third quarter for this investment. The investment is held in the held to maturity investments on the balance sheet. The Bank is closely monitoring and managing nonperforming assets. 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.dollars:

Because of the continuing efforts to identify and analyze the overall amount of credit risk in the Company’s loan portfolio, the Company expects the level of non-performing assets to remain at current levels throughout the remainder of 2011. The Bank believes it is adequately reserved on these loans.

	2012			2011

Beginning balance	$	3,339		$	2,354
Provision for loan losses		710			300
Charge-offs		(285	)		(849	)
Recoveries		40			40
Ending balance	$	3,804		$	1,845

~~Detail~~Management continually monitors its allowance for loan losses and as a result of this monitoring process recorded a loan loss provision of $710,000 for the ~~loans~~first onthree ~~nonaccrual~~months ~~status~~of 2012 bycompared to the prior year amount of $300,000 in the first three months of 2011. The amount of provisions for loan losses ~~type~~recognized by the Company is ~~presented~~based inon management’s evaluation as to the ~~table~~amounts ~~below:~~required to maintain an allowance adequate to provide for potential losses inherent in the loan portfolio.

	September 30,		December 31,
	2011		2010
	(In thousands)
Commercial	$	82	$	503
Commercial real estate		3,251		6,363
Consumer		—		—
Residential		96		26
Total	$	3,429	$	6,892

Loans modified under troubled debt restructurings (TDRs) involve a concession to a borrower who is experience financial difficulty. Concessions generally include modifications to original loan terms, including changes to a loan’s payment schedule or interest rate, which general would not otherwise be considered. The Company’s loans reported as TDRs continue to accrue interest at the loan’s effective interest rate. TDR’s are reported as nonperforming TDRs until a six-month payment history of principal and interest payments, in accordance with the loan modification, is sustained at which time the Company moved them to a performing TDR status. All TDRs are accounted for as impaired loans and are considered accordingly as part of the analysis of the allowance for loan losses.

The following provides information on performing and nonperforming TDRs as of September 30, 2011 that were modified during the three and nine months ended September 30, 2011:

CNB Corporation - Modifications
	Three Months Ended September 30, 2011						Nine Months Ended September 30, 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 real estate		9	$	3,434	$	3,434		9	$	3,434	$	3,434
Residential		3		271		262		3		271		262
Total		12	$	3,705	$	3,696		12	$	3,705	$	3,696

No restructured loans have subsequently defaulted during the nine month period ended September 30, 2011.

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
September 30, 2011
Commercial	$	—	$	—	$	—	$	4,451	$	4,451	$	—
Commercial Real Estate		209		—		209		49,783		49,992		—
Consumer		4		—		4		5,299		5,303		—
Residential		589		72		661		63,309		63,970		—
Total	$	802	$	72	$	874	$	122,842	$	123,716	$	—
December 31, 2010
Commercial	$	39	$	402	$	441	$	4,934	$	5,375	$	—
Commercial Real Estate		404		2,689		3,093		49,561		52,654		—
Consumer		31		8		39		5,977		6,016		8
Residential		824		91		915		66,394		67,309		91
Total	$	1,298	$	3,190	$	4,488	$	126,866	$	131,354	$	99

There were twenty-six loans in the loan portfolio that were considered impaired as of September 30, 2011. Six of the twenty-six loans considered impaired have a valuation allowance against probable losses. There were twenty-two loans that were considered impaired as of year-end December 31, 2010. Eight of the twenty-two loans considered impaired had a valuation allowance against probable losses.

~~Impaired~~Table ~~loans~~of ~~are presented in the table below (in thousands):~~ Contents

	Unpaid Contractual Principal Balance		Loans With No Allowance		Loans With Allowance		Total Impaired Loans		Related Allowance		Average Impaired Loan Balance		Interest Income Recognized
September 30, 2011
Commercial	$	118	$	28	$	12	$	40	$	12	$	295	$	1
Commercial Real Estate		5,010		1,942		3,068		5,010		1,271	$	3,564		20
Consumer		—		—		—		—		—	$	3		—
Residential		610		565		12		577		2	$	296		20
Total	$	5,738	$	2,535	$	3,092	$	5,627	$	1,285	$	4,158	$	41
December 31, 2010
Commercial	$	514	$	417	$	—	$	417	$	—	$	410	$	—
Commercial Real Estate		7,323		2,113		4,320		6,433		965		5,679		5
Consumer		10		10		—		10		—		17		1
Residential		76		26		34		60		15		278		2
Total	$	7,923	$	2,566	$	4,354	$	6,920	$	980	$	6,384	$	8

Deposits

~~Deposits~~As ~~atSeptember~~of 30March 31, ~~2011increased~~2012 total deposits increased $51.5 7 million ~~since~~from December 31, ~~2010~~2011.~~Customers~~ ofAccompanying the ~~Bank~~increase ~~are~~was ~~maintaining~~a ~~higher~~shift ~~than~~in ~~normal~~the ~~levels~~deposit ofmix ~~liquidity~~since ~~and~~December ~~cash~~31, ~~balances~~2011. Noninterest-bearing ~~due~~deposits toincreased ~~continued~~$4.1 ~~uncertainty~~million inor ~~the economy~~8.~~Interest~~2% while interest-bearing deposits decreased $32.54 million or 1.94% for the ~~nine~~three months ended ~~September~~March 3031, ~~2011, while noninterest-bearing deposits increased$9~~2012.0 ~~million or 21.5%.~~

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, ~~Federal Home Loan Bank overdraft line of credit~~ 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 $8.4 million or 3754.01% ~~to $30~~.9 ~~million.~~ During the ~~nine~~three month period ending ~~September~~March 3031, ~~2011~~2012, $~~788,000~~1.1 million in cash was ~~provided~~used ~~byoperating~~in operating activities. Investing activities provided $27.08 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2011,~~2012 ~~primarily due to a decrease in net portfolio loans~~ and financing activities provided $51.57 million ~~due to increasedtotal deposits~~.

As of ~~September~~March 3031, ~~2011~~2012, the Company had no federal funds sold, $2018.82 million onin ~~deposit~~interest-bearing atdeposits ~~the~~with ~~Federal~~other ~~Reserve~~financial institutions, $6974.31 million in securities available for sale and $~~374,000in~~1.2 million in held to maturity securities maturing within one year. These sources of liquidity are supplemented by new deposits and loan payments received by customers. These short-term assets represent 3840.47% of total deposits as of ~~September~~March 3031, ~~2011~~2012.

Total equity of the Company at ~~September~~March 3031, ~~2011~~2012 was $1918.~~7million~~1 million compared to $2018.60 million at December 31, ~~2010~~2011. The ~~decrease~~increase in equity for the ~~nine~~three months ended ~~September~~March 3031, ~~2011is~~2012 ~~due~~includes toan ~~a decrease~~ increase in retained earnings from ~~the year to date~~ net ~~loss.~~income ~~The~~and ~~Board~~a ofdecrease ~~Directors~~in ofthe ~~CNB~~accumulated ~~Corporation~~deficit. ~~voted~~This atwas ~~its~~offset ~~September8,~~by ~~2011~~a ~~meeting~~marginal ~~that~~decrease noin ~~dividend~~net ~~will~~changes related beto ~~paid~~accumulated ~~for~~other ~~the~~comprehensive ~~third quarter of 2011~~loss.

RESULTS OF OPERATIONS

CNB Corporation’s ~~2011~~2012 net ~~loss~~income for the first three ~~nine~~ months was ($~~1.4 million)~~365,000, aan ~~decrease~~increase of $~~2.2~~181,000 ~~million~~ compared to ~~2010~~2011 results. This ~~decrease~~increase in net income can be attributed for the most part to ~~the~~gains ~~fact~~on ~~that~~the ~~provision~~sales ~~expense~~ of ~~$2.0~~other ~~million~~real ~~was~~estate ~~recorded~~owned asand ofinvestment ~~September~~securities. ~~30,~~Net ~~2011~~interest asincome decreased compared to ~~$525,000 for~~ the same ~~period~~three inmonth ~~2010.~~period ~~The~~last ~~Bank~~year ~~also~~due ~~recorded $1.7 million~~ in ~~ORE~~part ~~losses~~to ~~and carrying costs for~~ the ~~current~~elevated ~~year~~level toof ~~day~~nonaccrual ~~period~~loans ~~compared~~and tothe ~~$656,000~~decreased loan ~~in 2010~~volume. ~~The~~This ~~increased~~decrease ~~2011~~in ~~ORE~~net ~~losses~~interest ~~include~~income ~~losses~~can onalso ~~sales~~be ~~and~~attributed ~~write-down as part of a strategy~~ to ~~eliminate Bank ORE therefore also eliminating~~ the ~~high~~current ~~carrying~~rate ~~costs of these properties~~environment.~~Also~~ ~~contributing~~While todeposit ~~the~~rates have ~~year~~reached ~~over~~near ~~year~~minimum ~~difference~~levels, inloans ~~net~~and ~~income~~investments iscontinue ~~the~~to ~~fact~~reprice ~~that~~at inlower ~~2010~~levels. ~~the~~Basic ~~Company~~and ~~recorded~~diluted ~~gains~~earnings onper share ~~life~~were ~~insurance~~$0.30 ~~proceeds~~for in2012 ~~the~~compared ~~amount~~to of $~~189,000~~0.15 ~~due~~for ~~to the death of a retired director~~2011. The return on assets was (0.7359%) for the first ~~nine~~three months of the year versus 0.4629% for the same period in ~~2010~~2011. The return on equity was (87.8397%) compared to 53.4955% for the same period last year.

~~Net~~For ~~loss for~~ the first three months ~~ending~~of ~~September 30~~2012, ~~2011~~net interest income was ($1.79 million) ~~compared~~representing to a ~~net~~decrease ~~income~~ of ~~$87,000 for 2010~~4.6% ~~This~~from ~~was~~the asame ~~decrease~~period ofin $12011.6 ~~million.~~ The ~~return~~fully ontaxable ~~average~~equivalent ~~assets~~net interest ~~was~~margin ~~(2.62%)~~decreased ~~compared~~ to 03.1442% for ~~2010.~~the ~~The~~three ~~return~~month onperiod ~~average~~ending ~~equity~~March ~~was (~~31~~.69%)~~, 2012 compared to 13.6453% for ~~2010.~~the ~~This~~same ~~decrease~~period ending inMarch ~~quarterly~~31, ~~earnings~~2011. isThis ~~due~~change can be attributable to the ~~provision~~same ~~expense~~reasons ~~and~~noted ~~ORE~~above. ~~loss~~The ~~reasons~~decreasing asinterest ~~mentioned~~rate environment ~~above~~and ~~for~~nonaccrual ~~the~~loans ~~year~~continue to ~~date~~cause ~~period~~a decrease in interest income on earning assets.

Interest income for the first nine months of 2011 was $7.2 million, a decrease of $688,000 or 8.8% compared to the 2010 results. This decrease in interest income can be attributed to a continuing low rate environment coupled with a shrinking loan portfolio. 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.20

~~Interest~~Table ~~income~~of for the quarter ending September 30, 2011 was $2.4 million compared to $2.5 million for the same period last year. This decrease is primarily for the same reasons as noted above for the year to date period.Contents

~~Interest~~Management ~~expense~~continually ~~for~~reviews ~~the~~changes ~~first~~in ~~nine~~the ~~months~~loan ofportfolio composition ~~2011~~and ~~was~~asset $1quality.1 ~~million,~~A aprovision ~~decrease~~expense of $~~492~~710,000 orwas ~~30.0%~~recorded ~~compared~~in tothe ~~2010~~first ~~results.~~three ~~This~~months ~~decrease~~in ~~can~~2012 beand ~~attributed~~$300,000 toin the first ~~continued~~three ~~low~~months ~~rate~~in ~~environment~~2011. ~~and~~It ~~change~~is inmanagement’s ~~deposit~~belief ~~mix~~that asset quality is stabilizing.

~~Interest~~Noninterest ~~expense~~income for the ~~quarter~~three months ending ~~September~~March 3031, ~~2011~~ 2012 was $~~356~~1.1 million,~~000~~ ~~compared~~an toincrease of $~~511~~734,000 ~~for~~from the same period last year. ~~This~~The ~~decrease~~increase isin ~~attributed~~noninterest toincome over the same ~~reasons~~period last asyear ~~noted~~was ~~above~~due for the ~~year~~most part to ~~date~~a $400,000 gain on the sale of other real estate owned and a $253,000 gain on the sale of investment securities. Also contributing to the increased level of noninterest income were increased gains from the sales of loans due to increase refinancing activity. Offsetting the increased gains from the sales of loans was a decrease in income from loan servicing fees from $23,000 for the three months ended March 31, 2011 to $2,000 for the same period in 2012.

~~For~~Noninterest expense for the first ~~nine~~three months of ~~2011,~~2012 ~~net interest income~~ was $61.0 9 million; ~~representing~~ a decrease of 3.20% from the same period inlast ~~2010~~year. The ~~fully~~Bank’s ~~taxable~~FDIC ~~equivalent~~premiums ~~net~~decreased ~~interest~~for ~~margin~~the ~~decreased~~first three months of 2012 compared to 3the same period last year.~~58%~~ ~~for~~In 2010 the ~~nine~~FDIC ~~month~~announced ~~period~~a ~~ending~~change ~~September~~to ~~30,~~the ~~2011~~FDIC ~~compared~~assessment calculation to 3base premiums on Bank assets rather than Bank deposits.~~73%~~ Along with that change was a decrease in the assessment rates. The change was effective for the ~~period~~2nd ~~ending~~quarter ~~September~~of ~~30,~~2011. ~~2010~~The Company continues to monitor and control expenses at all levels.

~~Year~~The toprovision ~~date~~for ~~net~~federal ~~charge-offs~~income ~~recorded~~tax inwas ~~the~~25.2% ~~allowance~~of pretax income for ~~loan~~the ~~losses~~three ~~were~~months ~~$1.4~~ended ~~million~~March ~~for~~31, ~~2011~~2012 as compared to $26.26% ~~million~~ for the same period in ~~2010~~2011. AThe ~~provision~~difference ~~expense~~between ~~of $2.0 millionwas recorded in~~ the effective ~~first~~tax ~~nine~~rate ~~months~~and ~~of 2011 compared to $525,000 in~~ the ~~first~~federal ~~nine~~corporate ~~months~~tax inrate ~~2010~~of in34% ~~order to maintain an acceptable allowance for loan loss level. The increased provision expense~~ is ingenerally ~~response~~due to ~~the~~tax-exempt ~~need~~interest toearned ~~replenish~~on ~~the~~investments and ~~allowance~~loans ~~for~~and ~~loan~~other ~~losses due to the continued high level of charge~~tax-~~offs~~related items.

Noninterest income for the nine months ending September 30, 2011 was $1.4 million, a decrease of $161,000 from the same period last year. This change between the two periods is attributed, mostly, due to one of the same reasons as indicated for the change in year to date net income. 2010 noninterest income included $189,000 of gains on life insurance proceeds while there was no life insurance gains recorded in 2011. The decrease in noninterest income between the two periods is also due, in part, to the continued decreasing rate environment in 2010resulting in an increased number of refinances of mortgages sold to the secondary market during that year thus increasing the Bank’s gains from the sales of these types of loans in 2010. There have been fewer mortgage refinances in 2011 and therefore fewer gains realized from the sales of mortgages.

Noninterest income for the three month period ending September 30, 2011 was $474,000compared to $516,000 for the same period last year. This represents adecrease of $42,000. This increase is attributable, mostly, to thedecreased gains from the sales of loans as noted above for the nine month period.

Noninterest expense for the first nine months of 2011 was $7.7 million, anincrease of$1.5 million compared to 2010 results. The change between the two periods is attributable, for the most part, to the increased ORE losses and carrying costs as previously discussed. ORE losses and carrying cost totaled $1.7 million for the nine month period ending September 30, 2011 as compared to $656,000 for the same period in 2010. Management has expressed the need to eliminate the continued carrying cost associated with ORE properties and has therefore discounted many properties to facilitate sales. Also increasing the 2011 noninterest expenses was an other-than-temporary impairment of $470,000 on a held to maturity investment security as discussed in the credit quality section above. Offsetting the increased expenses was a decreased to FDIC premiums. The Bank’s FDIC premiums decreased for the first nine months of 2011 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.

Noninterest expense for the three month period ending September 30, 2011 was $3.8 million, anincrease of $1.5 million compared to 2010 results. This change is primarily for the same reasons as noted above for the year to date period.

The provision for federal income tax was a tax benefit of 40.6% of pretax income for the nine months ended September 30, 2011 as compared to tax expense of 10.1% for the same period in 2010. 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, ~~thelonger~~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, ~~2010~~2011 Management Discussion and Analysis appearing in the December 31, ~~2010~~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.

2221

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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.

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 ~~September~~March 3031, ~~2011~~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.

PART II-OTHER INFORMATION

Item 1-Legal Proceedings

None

Item 1A.-Risk Factors

Not applicable.

Item 2- Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3-Defaults Upon Senior Securities

None

Item 4-(Removed and Reserved)

~~Item 5-Other Information~~22

~~None~~Table of Contents

Item 65-~~Exhibits~~Other ~~and Reports of Form 8-K~~Information

	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	Certificationpursuant to section 906 of the Sarbanes-Oxley Actof 2002 by the Chief Executive Officer
	32.2	Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
	b.)	Reports on Form 8-K

None

AItem ~~Current~~6-Exhibits ~~Report~~and onReports of Form 8-K ~~was filed on October18, 2011 announcing third quarter earnings.~~

23a.) Exhibits

~~Pursuant~~31.1 Certification pursuant to section 302 of the ~~requirements~~Sarbanes-Oxley Act of 2002 by the ~~Securities~~Chief ~~Exchange~~Executive Officer 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of ~~1934,~~2002 by the ~~registrant~~Principal ~~has~~Financial ~~duly~~Officer ~~caused~~32.1 ~~this~~Certification ~~report~~pursuant to besection ~~signed~~906 onof ~~its~~the ~~behalf~~Sarbanes-Oxley Act of 2002 by the ~~undersigned~~Chief ~~thereunto~~Executive ~~duly~~Officer ~~authorized~~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

	CNB Corporation
	(Registrant)
	/s/ Susan A. Eno
Date: November 14, 2011	Susan A. Eno
	President and Chief Executive Officer
	/s/ Douglas W. Damm
Date: November 14, 2011	Douglas W. Damm
	Executive Vice President

b.) Reports on Form 8-K

24A Current Report on Form 8-K was filed on March 9, 2012 updating shareholders of the Bank’s financial relationship with Cheboygan Memorial Hospital following the hospital’s bankruptcy filing.

~~EXHIBIT INDEX~~23

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

Table of Contents

25Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CNB Corporation
		(Registrant)

Date: May 10, 2012		/s/ Susan A. Eno
		Susan A. Eno
		President and Chief Executive Officer

Date: May 10, 2012		/s/ Douglas W. Damm
		Douglas W. Damm
		Executive Vice President

Table of Contents

EXHIBIT INDEX

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

Filing Compare · CNB CORP /MI/