FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
___________________
For Quarter Ended September 30, 1998 Commission file number: 2-96350
CNB Corporation
(Exact name of registrant as specified in its charter)
South Carolina 57-0792402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 320, Conway, South Carolina 29526
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (803) 248-5721
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X . No .
The number of shares outstanding of the issuer's $10.00 par value common
stock as of September 30, 1998 was 596,857.
<PAGE>
CNB Corporation
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998, 1
December 31, 1997 and September 30, 1997
Consolidated Statement of Income for the Three Months 2
and Nine Months Ended September 30, 1998 and 1997
Consolidated Statement of Comprehensive Income 3
for the Three Months and Nine Months Ended
September 30, 1998 and 1997
Consolidated Statement of Changes in Stockholders' 4
Equity for the Nine Months Ended September 30, 1998
and 1997
Consolidated Statement of Cash Flows for the Nine Months 5
Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial 14-25
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
<PAGE>
CNB Corporation and Subsidiary
Consolidated Balance Sheets
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, December 31, Sept. 30,
1998 1997 1997
ASSETS:
<S> <C> <C> <C>
Cash and due from banks $ 16,684 $ 14,371 $ 16,294
Interest bearing deposits with banks 0 0 0
Investment Securities 66,012 70,239 70,749
(Fair values of $67,383 at
Sept. 30, 1998, $70,893 at
December 31, 1997, and $71,249
at Sept. 30, 1997)
Securities Available for Sale 72,893 53,184 60,383
(Amortized cost of $71,955 at
Sept. 30, 1998, $52,855 at
December 31, 1997, and $60,168
at Sept. 30, 1997)
Federal Funds sold and securities
purchased under agreement
to resell 25,875 11,375 19,000
Loans:
Gross Loans 228,309 222,826 213,196
Less unearned income (1,099) (1,105) (1,163)
Loans, net of unearned income 227,210 221,721 212,033
Less reserve for possible
loan losses (3,160) (2,879) (2,905)
Net loans 224,050 218,842 209,128
Bank premises and equipment 7,156 6,798 6,998
Other assets 6,817 6,335 6,118
Total assets 419,487 381,144 388,670
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing 64,048 55,422 65,035
Interest-bearing 276,145 245,905 240,282
Total deposits 340,193 301,327 305,317
Federal funds purchased and
securities sold under agreement
to repurchase 32,137 32,366 37,922
Other short-term borrowings 1,390 5,000 4,303
Other liabilities 3,307 4,707 2,662
Minority interest in subsidiary 30 27 27
Total liabilities 377,057 343,427 350,231
Stockholders' equity:
Common stock, par value $10 per
share: Authorized 1,500,000;
issued 598,687 5,987 5,987 5,987
Surplus 24,553 24,552 24,551
Undivided Profits 11,498 7,030 7,784
Net Unrealized Holding 562 197 129
Gains (Losses) on
Available-For-Sale Securities
Less: Treasury stock (170) (49) (12)
Total stockholders' equity 42,430 37,717 38,439
Total liabilities
and stockholders' equity 419,487 381,144 388,670
</TABLE>
1
<PAGE>
CNB Corporation and Subsidiary
Consolidated Statement of Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Interest Income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 5,293 $ 4,904 $ 15,636 $ 14,103
Interest on investment securities:
Taxable investment securities 1,787 1,792 5,236 5,374
Tax-exempt investment securities 170 179 519 535
Other securities 0 0 3 3
Interest on federal funds sold and securities
purchased under agreement to resell 487 283 1,084 582
Total interest income 7,737 7,158 22,478 20,597
Interest Expense:
Interest on deposits 2,926 2,539 8,544 7,414
Interest on federal funds purchased and
securities sold under agreement to
repurchase 375 462 1,162 1,272
Interest on other short-term borrowings 23 21 66 56
Total interest expense 3,324 3,022 9,772 8,742
Net interest income 4,413 4,136 12,706 11,855
Provision for possible loan losses 160 150 525 600
Net interest income after provision for
possible loan losses 4,253 3,986 12,181 11,255
Other income:
Service charges on deposit accounts 660 583 1,806 1,643
Gains/(Losses) on securities 0 0 0 0
Other operating income 501 360 1,134 839
Total other income 1,161 943 2,940 2,482
Other expenses:
Minority interest in income of subsidiary 1 1 3 3
Salaries and employee benefits 1,696 1,535 5,060 4,611
Occupancy expense 425 380 1,242 1,224
Other operating expenses 784 705 2,113 2,011
Total operating expenses 2,906 2,621 8,418 7,849
Income before income taxes 2,508 2,308 6,703 5,888
Income tax provision 821 805 2,234 2,120
Net Income 1,687 1,503 4,469 3,768
Per share data:
Net income per weighted average shares
outstanding $ 2.83 $ 2.51 $ 7.48 $ 6.30
Cash dividend paid per share $ 0 $ 0 $ 0 $ 0
Book value per actual number of shares
outstanding $ 71.09 $ 64.22 $ 71.09 $ 64.22
Weighted average number of shares outstanding 597,708 598,486 597,708 598,486
Actual number of shares outstanding 596,857 598,538 596,857 598,538
</TABLE>
2
<PAGE>
CNB Corporation and Subsidiary
Consolidated Statement of Comprehensive Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $1,687 $1,503 $4,469 $3,768
Other comprehensive income, net of tax
Unrealized gains/(losses)
on securities:
Unrealized holding gains/(losses) 356 131 365 102
during period
Net Comprehensive Income $2,043 $1,634 $4,834 $3,870
</TABLE>
3
<PAGE>
CNB Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(All Dollar Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Common Stock:
$10 par value; 1,500,000 shares authorized
Balance, January 1 5,987 4,791
Issuance of Common Stock None None
Stock Dividend None 1,196
Balance at end of period 5,987 5,987
Surplus:
Balance, January 1 24,552 15,697
Issuance of Common Stock None None
Stock Dividend None 8,850
Gain on sale of treasury stock 1 4
Balance at end of period 24,553 24,551
Undivided profits:
Balance, January 1 7,030 14,082
Net Income 4,469 3,768
Stock Dividend None (10,066)
Cash dividends declared None None
Balance at end of period 11,498 7,784
Net unrealized holding gains/(losses) on
available-for-sale securities:
Balance, January 1 197 27
Change in net unrealized gains/(Losses) 365 102
Balance at end of period 562 129
Treasury stock:
Balance, January 1
(539 shares in 1998; 1,075 shares in 1997) (49) (101)
Purchase of treasury stock (278) (34)
Reissue of treasury stock 157 123
Balance at end of period
(1,824 shares in 1998; 143 shares in 1997) (170) (12)
Total stockholders' equity 42,430 38,439
</TABLE>
Note: Columns may not add due to rounding.
4
<PAGE>
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine-month period ended Sept. 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,469 $ 3,768
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 486 482
Provision for loan losses 525 600
Provision for deferred income taxes 102 157
Loss (gain) on sale of investment
securities 0 0
(Increase) decrease in accrued interest
receivable (367) (337)
(Increase) decrease in other assets (115) 29
(Decrease) increase in other liabilities 292 507
Increase in minority interest in
subsidiary 3 2
Net cash provided by operating
activities 5,395 5,208
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale 0 0
Proceeds from maturities of investment
securities held to maturity 17,032 15,130
Proceeds from maturities of investment
securities available for sale 12,341 12,301
Purchase of investment securities held to
maturity (12,805) (15,730)
Purchase of investment securities
available for sale (32,050) (10,546)
Decrease (increase) in interest-bearing
deposits in banks 0 0
(Increase) decrease in federal funds sold (14,500) (19,000)
(Increase) decrease in loans (5,489) (27,158)
Premises and equipment expenditures (844) (614)
Net cash provided by (used for)
investing activities (36,315) (45,617)
FINANCING ACTIVITIES
Dividends paid (1,794) (1,433)
Increase (Decrease) in deposits 38,866 36,904
(Decrease) increase in securities sold
under repurchase agreement (229) (4,904)
(Decrease) increase in other
short-term borrowings (3,610) 1,984
Increase (decrease)in obligation under
mortgages and capital leases 0 (6)
Net cash provided by (used for)
financing activities 33,233 42,353
Net increase (decrease) in cash
and due from banks 2,313 1,944
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 14,371 14,350
CASH AND DUE FROM BANKS, JUNE 30, 1998 AND 1997 $16,684 $16,294
CASH PAID (RECEIVED) FOR:
Interest $ 9,600 $ 8,401
Income taxes $ 2,215 $ 2,117
</TABLE>
<PAGE> 5
CNB CORPORATION AND SUBSIDIARY (The "Corporation")
CNB CORPORATION (The "Parent")
THE CONWAY NATIONAL BANK (The "Bank")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net income per share - Net income per share is computed on the basis of
the weighted average number of common shares outstanding, 597,708 for the
nine-month period ended September 30, 1998 and 598,486 for the nine-month
period ended September 30, 1997.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances either at the
Bank or on deposit with the Federal Reserve Bank. The average amount of
these reserve balances for the nine-month period ended September 30, 1998
and for the years ended December 31, 1997 and 1996 were approximately
$6,741, $5,909, and $5,112, respectively.
6
<PAGE>
NOTE 3 - INVESTMENT SECURITIES
Investment securities with a par value of approximately $76,165 at September
30, 1998 and $69,965 at December 31, 1997 were pledged to secure public
deposits and for other purposes required by law.
The following summaries reflect the book value, unrealized gains and losses,
approximate market value, and tax-equivalent yields of investment securities
at September 30, 1998 and at December 31, 1997.
<TABLE>
<CAPTION>
September 30, 1998
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1)
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
United States Treasury
Within one year $ 7,303 $ 39 $ 0 $ 7,342 6.23%
One to five years 8,969 221 0 9,190 6.10
16,272 260 0 16,532 6.16
Federal agencies
Within one year 7,345 43 0 7,388 6.15
One to five years 47,897 627 0 48,524 5.97
55,242 670 0 55,912 5.99
State, county and
municipal
Within one year 325 8 0 333 7.90
325 8 0 333 7.90
Other Securities(Equity) 116 0 0 116 -
Total available for sale $71,955 $ 938 $ 0 $72,893 6.04%
HELD TO MATURITY
United States Treasury
Within one year 9,683 52 1 9,734 5.89%
One to five years 7,026 128 0 7,154 6.16
16,709 180 1 16,888 6.00
Federal agencies
Within one year 1,022 2 0 1,024 5.48%
One to five years 34,400 701 0 35,101 6.12
35,422 703 0 36,125 6.10
State, county and
municipal
Within one year 1,227 15 0 1,242 9.55%
One to five years 7,342 230 0 7,572 7.92
Six to ten years 5,312 244 0 5,556 7.47
13,881 489 0 14,370 7.89
Total held to maturity $66,012 $1,372 $ 1 $67,383 6.46%
</TABLE>
(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended September 30, 1998, the Bank did not hold any
securities of an issuer that exceeded 10% of stockholders' equity. The
net unrealized holding gains/(losses) on available-for-sale securities
component of capital is $562 as of September 30, 1998.
7
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1997
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1)
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
United States Treasury
Within one year $10,252 $ 52 $ 8 $10,296 6.53%
One to five years 11,987 125 - 12,112 6.30
22,239 177 8 22,408 6.41
Federal agencies
Within one year 4,995 1 12 4,984 5.11
One to five years 23,805 158 18 23,945 6.26
After ten years 1,375 21 - 1,396 6.90
30,175 180 30 30,325 6.10
State, county and
municipal
One to five years 325 10 - 335 7.85
Other - restricted
Federal Reserve
Bank Stock 116 - - 116 6.03%
Total available for sale $52,855 $ 367 $ 38 $53,184 6.24%
HELD TO MATURITY
United States Treasury
Within one year 17,703 11 49 17,665 5.14%
One to five years 9,977 131 - 10,108 6.46
27,680 142 49 27,773 5.62
Federal agencies
One to five years 28,235 216 45 28,406 6.34
State, county and
municipal
Within one year 1,540 9 - 1,549 8.88
One to five years 6,436 214 1 6,649 8.71
Six to ten years 5,746 157 - 5,903 7.39
After ten years 602 11 - 613 7.39
14,324 391 1 14,714 8.14
Total held to maturity $70,239 $ 749 $ 95 $70,893 6.42%
</TABLE>
(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended December 31, 1997, the Bank did not hold any
securities of an issuer that exceeded 10% of stockholders' equity. The
net unrealized holding gains/(losses) on available-for-sale securities
component of capital is $197 as of December 31, 1997.
8
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans at September 30, 1998 and December
31, 1997 by major classification:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Real estate loans - mortgage $ 137,829 $ 136,441
- construction 18,233 19,653
Commercial and industrial loans 37,119 34,606
Loans to individuals for household,
family and other consumer expenditures 33,127 30,772
Agriculture 1,853 1,214
All other loans, including overdrafts 148 140
Gross loans 228,309 222,826
Less unearned income (1,099) (1,105)
Less reserve for loan losses (3,160) (2,879)
Net loans 224,050 218,842
</TABLE>
9
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, continued
Changes in the reserve for loan losses for the quarter ended and nine-
month period ended September 30, 1998 and 1997 and the year ended December
31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended December
September 30, September 30, 31,
1998 1997 1998 1997 1997
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 3,094 $ 2,707 $ 2,879 $ 2,370 $ 2,370
Charge-offs:
Commercial, financial,
and agricultural 40 20 111 84 238
Real Estate - construction
and mortgage 1 0 11 4 5
Loans to individuals 132 99 357 256 399
Total charge-offs $ 173 $ 119 $ 479 $ 344 $ 642
Recoveries:
Commercial, financial, and
agricultural $ 29 $ 45 $ 63 $ 67 $ 100
Real Estate - construction
and mortgage 0 92 4 106 106
Loans to individuals 50 30 168 106 145
Total recoveries $ 79 $ 167 $ 235 $ 279 $ 351
Net charge-offs/(recoveries) $ 94 $ (48) $ 244 $ 65 $ 291
Additions charge to operations $ 160 $ 150 $ 525 $ 600 $ 800
Balance, end of period $ 3,160 $ 2,905 $ 3,160 $ 2,905 $ 2,879
Ratio of net charge-offs during
the period to average loans
outstanding during the period .04% -% .11% .03% .14%
</TABLE>
The entire balance is available to absorb future loan losses.
At September 30, 1998 and December 31, 1997 loans on which no interest was
being accrued totalled approximately $44 and $24, respectively and
foreclosed real estate totalled $0 and $16, respectively; and loans 90 days
past due and still accruing totalled $144 and $135, respectively.
OTHER INTEREST-BEARING ASSETS
The Bank maintained an investment in an executive life insurance program
through Confederation Life Insurance and Annuity Company, Inc. During 1994
the Michigan Insurance Commission seized control of this United States
Corporation due to a similar action by the Canadian regulatory authorities over
the company's parent corporation, Confederation Life Insurance Company.
Regulatory oversight began as concerns regarding investment losses of the parent
corporation developed during 1993 and 1994. Management determined that any
impairment of the approximate $2,100,000 cash surrender value of the policies
was remote due to the financial stability of the US subsidiary. Subsequently,
on October 23, 1996, a plan of Rehabilitation for Confederation Life Insurance
Company (U.S.) was confirmed by the State of Michigan in the Circuit Court for
the County of Ingham. The plan provided for the assumption of company owned
life insurance policies (COLI), such as the Bank's, to be assumed by Pacific
Mutual Life Insurance Company. Under the agreement, holders of COLI policies
had the option to have a policy reinsured by Pacific Mutual which was expected
to have the same account value and substantially the same contract terms as the
original policy or to receive the liquidation or "opt-out" value of the policy.
The Bank's independent external auditors revisited the facts and circumstances
regarding the investment in the COLI program and read the related guidance in
SFAS No. 5 and SAB Topic 5(Y). There continues to be no significant
uncertainties requiring the recognition of a loss contingency.
The Bank's COLI policies were reinsured by Pacific Mutual during the third
quarter of 1997. Management received permission from the Office of the
Comptroller of the Currency to return this asset to accrual status and to adjust
the carrying value during the first quarter of 1998 with the total cash
surrender values totalling approximately $85,000 above the carrying value on the
bank's books.
As of September 30, 1998, the Company does not have any interest-bearing
assets that would be required to be disclosed under Item III.C.1. or 2. if
such assets were loans.
10
<PAGE>
NOTE 5 - PREMISES AND EQUIPMENT
Property at September 30, 1998 and December 31, 1997 is summarized as
follows:
September 30, December 31,
1998 1997
Land and buildings $ 8,949 $ 8,853
Furniture, fixtures and equipment 5,370 5,313
Construction in progress 529 2
$ 14,848 $ 14,168
Less accumulated depreciation and
amortization 7,692 7,370
$ 7,156 $ 6,798
Depreciation and amortization of bank premises and equipment charged to
operating expense was $157 and $486 for the quarter ended and the nine-
month period ended September 30, 1998, respectively and $700 for the year
ended December 31, 1997.
NOTE 6 - CERTIFICATES OF DEPOSIT IN EXCESS OF $100,000
At September 30, 1998 and December 31, 1997, certificates of deposit of
$100,000 or more included in time deposits totaled approximately $63,681 and
$56,305 respectively. Interest expense on these deposits was approximately
$859 and $2,616 for the quarter ended and the nine-month period ended
September 30, 1998 and $2,815 the year ended December 31, 1997.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At September 30, 1998 and December 31, 1997, securities sold under
repurchase agreements totaled approximately $32,137 and $32,366. U.S.
Government securities with a book value of $35,950 ($36,581 market value)
and $38,984 ($39,242 market value), respectively, are used as collateral for
the agreements. The weighted-average interest rate of these agreements was
4.41 percent and 4.61 percent at September 30, 1998 and December 31, 1997.
NOTE 8 - LINES OF CREDIT
At September 30, 1998, the Bank had unused short-term lines of credit
to purchase Federal Funds from unrelated banks totaling $23,000. These
lines of credit are available on a one to seven day basis for general
corporate purposes of the Bank. All of the lenders have reserved the right
to withdraw these lines at their option.
The Bank has a demand note through the U.S. Treasury, Tax and Loan
system with the Federal Reserve Bank of Richmond. The Bank may borrow up to
$7,000 under the arrangement at a variable interest rate. The note is
secured by U.S. Treasury Notes with a market value of $7,977 at September
30, 1998. The amount outstanding under the note totaled $1,390 and $5,000
at September 30, 1998 and December 31, 1997, respectively.
NOTE 9 - INCOME TAXES
Income tax expense for the quarter ended September 30, 1998 and
September 30, 1997 on pretax income of $2,508 and $2,308 totalled $821 and
$805 respectively. Income tax expense for the nine-month period ended
September 30, 1998 and September 30, 1997 on pretax income of $6,703 and
$5,888 totalled $2,234 and $2,120 respectively. The provision for federal
income taxes is calculated by applying the 34% statutory federal income tax
rate and increasing or reducing this amount due to any tax-exempt interest,
state bank tax (net of federal benefit), business credits, surtax exemption,
tax preferences, alternative minimum tax calculations, or other factor. A
summary of income tax components and a reconciliation of income taxes to the
federal statutory rate are included in fiscal year-end reports.
Effective January 1, 1992, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS 109 replaces SFAS 96 beginning in 1993, with early
implementation permitted. The impact of the adoption of SFAS 109 is not
considered to be material.
11
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
From time to time the bank subsidiary is a party to various litigation,
both as plaintiff and as defendant, arising from its normal operations. No
material losses are anticipated in connection with any of these matters at
September 30, 1998.
Also, in the normal course of business, the bank subsidiary has
outstanding commitments to extend credit and other contingent liabilities,
which are not reflected in the accompanying financial statements. At
September 30, 1998, commitments to extend credit totalled $20,636; financial
standby letters of credit totalled $63; and performance standby letters of
credit totalled $827. In the opinion of management, no material losses or
liabilities are expected as a result of these transactions.
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Bank has a defined contribution pension plan covering all
employees who have attained age twenty-one and have a minimum of one year of
service. Upon ongoing approval of the Board of Directors, the Bank matches
one hundred percent of employee contributions up to one percent of employee
salary deferred and fifty percent of employee contributions in excess of one
percent and up to six percent of salary deferred. The Board of Directors
may also make discretionary contributions to the Plan. For the three-month
and nine-month period ended September 30, 1998 and years ended December 31,
1997, 1996 and 1995, $94, $281, $367, $336, and $266, respectively, was
charged to operations under the plan.
NOTE 12 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory -and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. The regulations require
the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital
classification is also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the maintenance of minimum amounts and ratios (set forth in
the table below) of Tier I capital to adjusted total assets (Leverage
Capital ratio) and minimum ratios of Tier I and total capital to risk-
weighted assets. To be considered adequately capitalized under the
regulatory framework for prompt corrective action, the Bank must maintain
minimum Tier I leverage, Tier I risk-based and total risked-based ratios as
set forth in the table. The Bank's actual capital ratios are presented in
the table below as of September 30, 1998:
To be
well capitalized
For under prompt
capital adequacy corrective action
purposes provisions
Actual Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk $42,995 17.80% $19,321 8.0% $24,151 10.0%
weighted assets)
Tier I Capital (to risk 39,976 16.55 9,660 4.0 14,491 6.0
weighted assets)
Tier I Capital (to avg. 39,976 9.71 16,463 4.0 20,579 5.0
assets)
12
<PAGE>
NOTE 13 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of CNB Corporation (parent
company only):
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
ASSETS
Cash $ 1,640
Investment in subsidiary 40,508
Fixed assets 245
Other assets 37
$ 42,430
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liability $ 0
Stockholders' equity 42,430
$ 42,430
CONDENSED STATEMENT OF INCOME
For the nine-month period ended September 30, 1998
(Unaudited)
EQUITY IN NET INCOME OF SUBSIDIARY $ 4,498
OTHER INCOME 7
OTHER EXPENSES (36)
Net Income $ 4,469
DISCUSSION OF FORWARD-LOOKING STATEMENTS
Information in the enclosed report, other than historical information, may
contain forward-looking statements that involve risks and uncertainties,
including, but not limited to, timing of certain business initiatives of the
Company, the Company's interest rate risk condition, and future regulatory
actions of the Comptroller of the Currency and Federal Reserve System. It
is important to note that the Company's actual results may differ materially
and adversely from those discussed in forward-looking statements.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis is provided to afford a clearer
understanding of the major elements of the corporation's results of
operations, financial condition, liquidity, and capital resources. The
following discussion should be read in conjunction with the corporation's
financial statements and notes thereto and other detailed information
appearing elsewhere in this report. In addition, the results of operations
for the interim periods shown in this report are not necessarily indicative
of results to be expected for the fiscal year. In the opinion of
management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations. All such adjustments are of a normal and
recurring nature.
DISTRIBUTION OF ASSETS AND LIABILITIES
The Company maintains a conservative approach in determining the
distribution of assets and liabilities. Loans, net of unearned income, have
slowed to an increase of 7.2% from $212,033 at September 30, 1997 to
$227,210 at September 30, 1998 and have decreased as a percentage of total
assets from 54.6% to 54.2% over the same period as loan demand has slowed
somewhat in our market. Correspondingly, securities and federal funds sold
have increased as a percentage of total assets from 38.6% at September 30,
1997 to 39.3% at September 30, 1998. This level of investments and federal
funds sold provides for a more than adequate supply of secondary liquidity.
Management has sought to build the deposit base with stable, relatively
non-interest-sensitive deposits by offering the small to medium deposit
account holders a wide array of deposit instruments at competitive rates.
Non-interest-bearing demand deposits decreased as a percentage of total
assets from 16.7% at September 30, 1997 to 15.3% at September 30, 1998. As
more customers, both business and personal, are attracted to
interest-bearing deposit accounts, we expect a decline in the percentage of
demand deposits over the long-term. Interest-bearing deposits have increased
from 61.8% of total assets at September 30, 1997 to 65.8% at September 30,
1998 while securities sold under agreement to repurchase have decreased from
9.8% to 7.7% over the same period.
The following table sets forth the percentage relationship to total assets
of significant components of the corporation's balance sheet as of September
30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30,
<S> <C> <C>
Assets: 1998 1997
Earning assets:
Loans, net of unearned income 54.2% 54.6%
Investment securities 15.7 18.2
Securities Available for Sale 17.4 15.5
Federal funds sold and securities purchased
under agreement to resell 6.2 4.9
Other earning assets - -
Total earning assets 93.5 93.2
Other assets 6.5 6.8
Total assets 100.0% 100.0%
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits 65.8% 61.8%
Federal funds purchased and securities sold
under agreement to repurchase 7.7 9.8
Other short-term borrowings .3 1.1
Total interest-bearing liabilities 73.8 72.7
Noninterest-bearing deposits 15.3 16.7
Other liabilities .8 .7
Stockholders' equity 10.1 9.9
Total liabilities and stockholders' equity 100.0% 100.0%
</TABLE>
<PAGE> 14
RESULTS OF OPERATION
CNB Corporation experienced earnings for the three-month period ended
September 30, 1998 and 1997 of $1,687 and $1,503, respectively, resulting in
a return on average assets of 1.57% and 1.55% and a return on average
stockholders' equity of 16.32% and 16.02%.
CNB Corporation experienced earnings for the nine-month period ended
September 30, 1998 and 1997 of $4,469 and $3,768, respectively, resulting in
a return on average assets of 1.45% and 1.35% and a return on average
stockholders' equity of 14.96% and 14.05%.
The earnings were primarily attributable to net interest margins in each
period (see Net Income-Net Interest Income). Other factors include
management's ongoing effort to maintain other income at adequate levels (see
Net Income - Other Income) and to control other expenses (see Net Income -
Other Expenses). This level of earnings, coupled with a conservative
dividend policy, have supplied the necessary capital funds to support the
growth in total assets. Total assets have increased $30,817 or 7.9% from
$388,670 at September 30, 1997 to $419,487 at September 30, 1998. The
following table sets forth the financial highlights for the three-month and
nine-month periods ending September 30, 1998 and September 30, 1997:
CNB Corporation
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
<TABLE>
<CAPTION>
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
Percent Percent
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses 4,253 3,986 6.7% 12,181 11,255 8.2%
Income before income taxes 2,508 2,308 8.7 6,703 5,888 13.8
Net Income 1,687 1,503 12.2 4,469 3,768 18.6
Per Share 2.83 2.51 12.7 7.48 6.30 18.7
Cash dividends declared 0 0 - 0 0 -
Per Share 0 0 - 0 0 -
Total assets 419,487 388,670 7.9% 419,487 388,670 7.9%
Total deposits 340,193 305,317 11.4 340,193 305,317 11.4
Loans, net of unearned income 227,210 212,033 7.2 227,210 212,033 7.2
Investment securities and
securities available for
sale 138,905 131,132 5.9 138,905 131,132 5.9
Stockholders' equity 42,430 38,439 10.4 42,430 38,439 10.4
Book value per share 71.09 64.22 10.7 71.09 64.22 10.7
Ratios (1):
Annualized return on average
total assets 1.57% 1.55% 1.3% 1.45% 1.35% 7.4%
Annualized return on average
stockholders' equity 16.32% 16.02% 1.9% 14.96% 14.05% 6.5%
</TABLE>
(1) For the three-month period ended September 30, 1998 and September 30,
1997, average total assets amounted to $429,596 and $388,016 with
average stockholders' equity totaling $41,356 and $37,524, respectively.
For the nine-month period ended September 30, 1998 and September 30,
1997, average total assets amounted to $411,942 and $373,326 with
average stockholders' equity totaling $39,818 and $35,748, respectively.
15
<PAGE>
NET INCOME
Net Interest Income - Earnings are dependent to a large degree on net
interest income, defined as the difference between gross interest and fees
earned on earning assets, primarily loans and securities, and interest paid
on deposits and borrowed funds. Net interest income is effected by the
interest rates earned or paid and by volume changes in loans, securities,
deposits, and borrowed funds.
Interest rates paid on deposits and borrowed funds and earned on loans and
investments have generally followed the fluctuations in market interest
rates in 1998 and 1997. However, fluctuations in market interest rates do
not necessarily have a significant impact on net interest income, depending
on the bank's rate sensitivity position. A rate sensitive asset (RSA) is
any loan or investment that can be repriced either up or down in interest
rate within a certain time interval. A rate sensitive liability (RSL) is an
interest paying deposit or other liability that can be repriced either up or
down in interest rate within a certain time interval. When a proper balance
between RSA and RSL exists, market interest rate fluctuations should not
have a significant impact on earnings. The larger the imbalance, the greater
the interest rate risk assumed by the bank and the greater the positive or
negative impact of interest rate fluctuations on earnings. The bank seeks
to manage its assets and liabilities in a manner that will limit interest
rate risk and thus stabilize longrun earning power. Management believes
that a rise or fall in interest rates will not materially effect earnings.
The Bank has maintained adequate net interest margins for the three-month
and nine-month periods ended September 30, 1998 and 1997 by earning
satisfactory yields on loans and securities and funding these assets with a
favorable deposit mix containing a significant level of noninterest-bearing
demand deposits.
Fully-tax-equivalent net interest income showed a 6.4% increase from $4,229
for the three-month period ended September 30, 1997 to $4,500 for the
three-month period ended September 30, 1998. During the same period, total
fully-tax-equivalent interest income increased by 7.9% from $7,251 to $7,824
and total interest expense increased by 10.0% from $3,022 to $3,324.
Fully-tax-equivalent net interest income as a percentage of total earning
assets has shown a decrease of .13% from 4.67% for the three-month period
ended September 30, 1997 to 4.54% for the three-month period ended September
30, 1998.
Fully-tax-equivalent net interest income showed a 6.9% increase from $12,131
for the nine-month period ended September 30, 1997 to $12,973 for the nine-
month period ended September 30, 1998. During the same period, total fully-
tax-equivalent interest income increased by 9.0% from $20,873 to $22,745 and
total interest expense increased by 11.8% from $8,742 to $9,772. Fully-tax-
equivalent net interest income as a percentage of total earning assets has
shown a decrease of .13% from 4.64% for the nine-month period ended
September 30, 1997 to 4.51% for the nine-month period ended September 30,
1998.
The tables on the following four pages present selected financial data and
an analysis of net interest income.
16
<PAGE>
CNB Corporation and Subsidiary
Selected Financial Data
<TABLE>
<CAPTION>
Three Months Ended 9/30/98 Three Months Ended 9/30/97
Avg. Interest Avg. Ann. Avg. Interest Avg.Ann.
Balance Income/ Yield or Balance Income/ Yield or
Expense(1) Rate Expense(1) Rate
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning assets:
Loans, net of unearned income $229,926 $ 5,293 9.21% $209,965 $ 4,904 9.34%
Securities:
Taxable 117,565 1,787 6.08 118,336 1,792 6.06
Tax-exempt 13,636 257 7.54 13,879 272 7.84
Federal funds sold and
securities purchased under
agreement to resell 35,127 487 5.55 20,400 283 5.55
Other earning assets 0 0 - 0 0 -
Total earning assets 396,254 7,824 7.90 362,580 7,251 8.00
Other assets 33,342 25,436
Total assets $429,596 $388,016
Liabilities and stockholders equity
Interest-bearing liabilities:
Interest-bearing deposits $272,783 2,926 4.29 $240,732 $ 2,539 4.22
Federal funds purchased and
securities sold under
agreement to repurchase 34,048 375 4.41 38,553 462 4.79
Other short-term borrowings 1,533 23 6.00 1,612 21 5.21
Total interest-bearing
liabilities $308,364 $ 3,324 4.31 $280,897 $ 3,022 4.30
Noninterest-bearing deposits 70,228 65,621
Other liabilities 9,648 3,974
Stockholders' equity 41,356 37,524
Total liabilities and
stockholders' equity $429,596 $388,016
Net interest income as a percent
of total earning assets $396,254 $ 4,500 4.54 $362,580 $ 4,229 4.67
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 87 $ 93
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Ratios:
Annualized return on average total assets 1.57 1.55
Annualized return on average stockholders' equity 16.32 16.02
Cash dividends declared as a percent of net income 0 0
Average stockholders' equity as a percent of:
Average total assets 9.63 9.67
Average total deposits 12.06 12.25
Average loans, net of unearned income 17.99 17.87
Average earning assets as a percent of
average total assets 92.24 93.44
</TABLE>
17
<PAGE>
CNB Corporation and Subsidiary
Selected Financial Data
<TABLE>
<CAPTION>
Nine Months Ended 9/30/98 Nine Months Ended 9/30/97
Avg. Interest Avg. Ann. Avg. Interest Avg.Ann.
Balance Income/ Yield or Balance Income/ Yield or
Expense(1) Rate Expense(1) Rate
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning assets:
Loans, net of unearned income $227,986 $15,636 9.14% $201,261 $14,103 9.34%
Securities:
Taxable 115,083 5,239 6.07 119,100 5,377 6.02
Tax-exempt 13,620 786 7.69 13,791 811 7.84
Federal funds sold and
securities purchased under
agreement to resell 27,147 1,084 5.32 14,552 582 5.33
Other earning assets 0 0 - 0 0 -
Total earning assets 383,836 22,745 7.90 348,704 20,873 7.98
Other assets 28,106 24,622
Total assets $411,942 $373,326
Liabilities and stockholders equity
Interest-bearing liabilities:
Interest-bearing deposits $265,831 8,544 4.29 $238,686 $ 7,414 4.14
Federal funds purchased and
securities sold under
agreement to repurchase 34,624 1,162 4.47 36,099 1,272 4.70
Other short-term borrowings 1,555 66 5.66 1,470 56 5.08
Total interest-bearing
liabilities $302,010 $ 9,772 4.31 $276,255 $ 8,742 4.22
Noninterest-bearing deposits 64,604 58,073
Other liabilities 5,510 3,250
Stockholders' equity 39,818 35,748
Total liabilities and
stockholders' equity $411,942 $373,326
Net interest income as a percent
of total earning assets $383,836 $12,973 4.51 $348,704 $12,131 4.64
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 267 $ 276
</TABLE>
<TABLE>
<CAPTION>
<S>
Ratios: <C> <C>
Annualized return on average total assets 1.45 1.35
Annualized return on average stockholders' equity 14.96 14.05
Cash dividends declared as a percent of net income 0 0
Average stockholders' equity as a percent of:
Average total assets 9.67 9.58
Average total deposits 12.05 12.05
Average loans, net of unearned income 17.47 17.76
Average earning assets as a percent of
average total assets 93.18 93.40
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Three Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Change
Average Average Interest Interest Change Change Due To
Volume Volume Yield/Rate Yield/Rate Earned/Paid Earned/Paid Due to Due To Rate X
1998 1997 1998 (1) 1997 (1) 1998 (1) 1997 (1) Variance Rate Volume Volume
Earning Assets:
Loans, Net of unearned
income (2) 229,926 209,965 9.21% 9.34% 5,293 4,904 389 (68) 466 (9)
Investment securities:
Taxable 117,565 118,336 6.08% 6.06% 1,787 1,792 (5) 6 (12) 1
Tax-exempt 13,636 13,879 7.54% 7.84% 257 272 (15) (10) (5) -
Federal funds sold and
securities purchased under
agreement to resell 35,127 20,400 5.55% 5.55% 487 283 204 - 204 -
Other earning assets 0 0 - - 0 0 0 - - -
Total Earning Assets 396,254 362,580 7.90% 8.00% 7,824 7,251 573 (72) 653 (8)
Interest-bearing Liabilities:
Interest-bearing deposits 272,783 240,732 4.29% 4.22% 2,926 2,539 387 42 338 7
Federal funds purchased and
securities sold under
agreement to repurchase 34,048 38,553 4.41% 4.79% 375 462 (87) (37) (54) 4
Other short-term borrowings 1,533 1,612 6.00% 5.21% 23 21 2 3 (1) -
Total Interest-bearing
Liabilities 308,364 280,897 4.31% 4.30% 3,324 3,022 302 8 283 11
Interest-free Funds
Supporting Earning Assets 87,890 81,683
Total Funds Supporting
Earning Assets 396,254 362,580 3.36% 3.33% 3,324 3,022 302 8 283 11
Interest Rate Spread 3.59% 3.70%
Impact of Non-interest-
bearing
Funds on Net Yield on
Earning Assets .95% .97%
Net Yield on Earning
Assets 4.54% 4.67% 4,500 4,229
</TABLE>
(1) Tax-equivalent adjustment based on a 34% tax rate.
(2) Includes non-accruing loans which does not have a material effect on the
Net Yield on Earning Assets.
19
<PAGE>
<TABLE>
<CAPTION>
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Change
Average Average Interest Interest Change Change Due To
Volume Volume Yield/Rate Yield/Rate Earned/Paid Earned/Paid Due to Due To Rate X
1998 1997 1998 (1) 1997 (1) 1998 (1) 1997 (1) Variance Rate Volume Volume
Earning Assets:
Loans, Net of unearned
income (2) 227,986 201,261 9.14% 9.34% 15,636 14,103 1,533 (302) 1,872 (37)
Investment securities:
Taxable 115,083 119,100 6.07% 6.02% 5,239 5,377 (138) 45 (181) (2)
Tax-exempt 13,620 13,791 7.69% 7.84% 786 811 (25) (16) (10) 1
Federal funds sold and
securities purchased under
agreement to resell 27,147 14,552 5.32% 5.33% 1,084 582 502 (1) 503 -
Other earning assets 0 0 - - 0 0 - - - -
Total Earning Assets 383,836 348,704 7.90% 7.98% 22,745 20,873 1,872 (274) 2,184 (38)
Interest-bearing Liabilities:
Interest-bearing deposits 265,831 238,686 4.29% 4.14% 8,544 7,414 1,130 269 843 18
Federal funds purchased and
securities sold under
agreement to repurchase 34,624 36,099 4.47% 4.70% 1,162 1,272 (110) (62) (52) 4
Other short-term borrowings 1,555 1,470 5.66% 5.08% 66 56 10 6 3 1
Total Interest-bearing
Liabilities 302,010 276,255 4.31% 4.22% 9,772 8,742 1,030 213 794 23
Interest-free Funds
Supporting Earning Assets 81,826 72,449
Total Funds Supporting
Earning Assets 383,836 348,704 3.39% 3.34% 9,772 8,742 1,030 213 794 23
Interest Rate Spread 3.59% 3.76%
Impact of Non-interest-
bearing
Funds on Net Yield on
Earning Assets .92% .88%
Net Yield on Earning
Assets 4.51% 4.64% 12,973 12,131
</TABLE>
(1) Tax-equivalent adjustment based on a 34% tax rate.
(2) Includes non-accruing loans which does not have a material effect on the
Net Yield on Earning Assets.
20
<PAGE>
NET INCOME (continued)
Provision for Possible Loan Losses - It is the policy of the bank to maintain
the reserve for possible loan losses at the greater of 1.20% of net loans or
the percentage based on the actual loan loss experience over the previous five
years. In addition, management may increase the reserve to a level above these
guidelines to cover potential losses identified in the portfolio.
The provision for possible loan losses was $160 for the three-month period
ended September 30, 1998 and $150 for the three-month period ended September
30, 1997. Net loan charge-offs/(recoveries) totaled $94 for the three-month
period ended September 30, 1998 and $(48) for the same period in 1997.
The provision for possible loan losses was $525 for the nine-month period ended
September 30, 1998 and $600 for the nine-month period ended September 30, 1997.
Net loan charge-offs/(recoveries) totaled $244 for the nine-month period ended
September 30, 1998 and $65 for the same period in 1997.
The reserve for possible loan losses as a percentage of net loans was 1.41%
at September 30, 1998 and 1.39% at September 30, 1997. The relatively flat
provision during the three-month and nine-month period ended September 30,
1998 was due to the decreased rate of loan growth. Continued moderate net
charge-offs through the remainder of 1998 are anticipated by management.
Securities Transactions - The Bank had no security sales during the first
three quarters of 1998 or 1997. At September 30, 1998, December 31, 1997, and
September 30, 1997 market value appreciation/(depreciation) in the securities
portfolio totaled $2,309, $983, and $715. As indicated, market value increased
in 1997 and 1998 due to falling market interest rates.
Other Income - Other income, net of any gains/losses on security transactions,
increased by 23.1% from $943 for the three-month period ended September 30,
1997 to $1,161 for the three-month period ended September 30, 1998.
Other income, net of any gains/losses on security transactions, increased by
18.5% from $2,482 for the nine-month period ended September 30, 1997 to $2,940
for the nine-month period ended September 30, 1998.
This increase in the three-month and nine-month period ended September 30, 1998
was due to an increase in deposit account volumes; higher merchant discount
income, and a June 1, 1997 increase in overall service charge rates.
Other Expenses - Other expenses increased by 10.9% from $2,621 for the three-
month period ended September 30, 1997 to $2,906 for the three-month period
ended September 30, 1998. The major components of other expenses are salaries
and employee benefits which increased 10.5% from $1,535 to $1,696; occupancy
expense which increased 11.8% from $380 to $425; and other operating expenses
which increased by 11.2% from $705 to $784.
<PAGE> 21
Other Expenses (continued) - All categories of other expenses have increased
due to the construction, staffing, and equipping of the new "West Conway Office"
scheduled to open in October, 1998. Full-time-equivalent employee numbers have
increased from 183 at September 30, 1997 to 197 at September 30, 1998.
Other expenses increased by 7.2% from $7,849 for the nine-month period ended
September 30, 1997 to $8,418 for the nine-month period ended September 30,
1998. The major components of other expenses are salaries and employee
benefits which increased 9.7% from $4,611 to $5,060; occupancy expense which
increased 1.5% from $1,224 to $1,242; and other operating expense which
increased by 5.1% from $2,011 to $2,113. Other expenses increased due to the
afore-mentioned addition to the Bank's
branching system.
Income Taxes - Provisions for income taxes increased 2.0% from $805 for the
three-month period ended September 30, 1997 to $821 for the three-month period
ended September 30, 1998. Income before income taxes less interest on tax-
exempt investment securities increased by 9.8% from $2,129 for the three-month
period ended September 30, 1997 to $2,338 for the same period in 1998. State
tax liability increased as income before income taxes increased 8.7% from
$2,308 to $2,508 during the same period.
Provisions for income taxes increased 5.4% from $2,120 for the nine-month
period ended September 30, 1997 to $2,234 for the nine-month period ended
September 30, 1998. Income before income taxes less interest on tax-exempt
investment securities increased by 15.5% from $5,353 for the nine-month period
ended September 30, 1997 to $6,184 for the same period in 1998 and state tax
liability increased as income before income taxes increased 13.8% from $5,888
to $6,703 during the same period.
LIQUIDITY
The bank's liquidity position is primarily dependent on short-term demands for
funds caused by customer credit needs and deposit withdrawals and upon the
liquidity of bank assets to meet these needs. The bank's liquidity sources
include cash and due from banks, federal funds sold and short-term
investments. In addition, the bank has established federal funds lines of
credit from correspondent banks and has the ability, on a short-term basis, to
borrow funds from the Federal Reserve System. Management feels that short-term
and long-term liquidity sources are more than adequate to meet funding needs.
CAPITAL RESOURCES
Total stockholders' equity was $42,430, $37,717, $34,496, and $32,195 at
September 30, 1998, December 31, 1997, December 31, 1996, and December 31,
1995, representing 10.11%, 9.90%, 10.09%, and 9.91% of total assets,
respectively. At September 30, 1998, the Bank exceeds quantitative measures
established by regulation to ensure capital adequacy (see NOTE 12 - REGULATORY
MATTERS). Capital is considered sufficient by management to meet current and
prospective capital requirements and to support anticipated growth in bank
operations.
<PAGE> 22
CAPITAL RESOURCES (continued)
The Company paid an approximate 25% stock dividend on September 12, 1997. The
Board continued to pay a $3.00 per share annual cash dividend at year-end 1997
on the increased number of outstanding shares which has the effect of
increasing the cash dividend payout ratio and cash dividend yield.
EFFECTS OF REGULATORY ACTION
The management of the Company and the Bank is not aware of any current
recommendations by the regulatory authorities which, if they were to be
implemented, would have a material effect on liquidity, capital resources, or
operations.
ACCOUNTING ISSUES
The FASB issued Statement of Financial Accounting Standard (SFAS) No. 129,
"Disclosure of Information about Capital Structure" in February 1997. The
purpose of SFAS 129 is to consolidate existing disclosure requirements for
ease of retrieval. SFAS 129 contains no change in disclosure requirements for
companies that were subject to the previously existing requirements. It applies
to all entities and is effective for financial statements for periods ending
after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 requires that
companies (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial condition. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods for comprehensive
purposes is required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes standards for the
way public enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 becomes effective for financial statements for periods
beginning after December 15, 1997, and requires that comparative information
from earlier years be restated to conform to its requirements. The adoption of
the provisions of SFAS 131 is not expected to have a material impact on the
Company.
<PAGE> 23
ACCOUNTING ISSUES (continued)
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instrument
and Hedging Activities". All derivatives are to be measured at fair value and
recognized in the statement of financial position as assets or liabilities.
The statement is effective for fiscal years and quarters beginning after June
15, 1999. Because the Company has limited use of derivative transactions at
this time, management does not expect that this standard would have a
significant effect on the Company.
In April 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits". The new Statement revises the required
disclosures for employee benefit plans, but it does not change the measurement
or recognition of such plans. While the new standard requires some additional
information about benefit plans, it helps preparers of financial statements by
eliminating certain disclosures and by standardizing the disclosures for
pensions and other postretirement benefits to the extent practicable. SFAS 132
supercedes the disclosure requirements in SFAS 87, "Employers' Accounting for
Pensions", SFAS 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", and SFAS 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions". The
new disclosures are effective for fiscal years beginning after December 15,
1997. The adoption of SFAS 132 will not have an impact on the financial
statements of the Company due to the disclosure only requirements.
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1), which provided guidance as
to when it is or is not appropriate to capitalize the cost of software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998 with early
adoption encouraged. The Company does not anticipate that adoption of SOP 98-1
will have a material effect on its financial statements.
YEAR 2000
The Year 2000 poses a significant challenge for financial institutions because
of the way date fields have been historically handled. Older versions of
software used a two digit year date field and assumed the first two digits of
the year date to be "19". All software applications using this dating method
must be replaced or modified to avoid computer systems reverting to the year
date of 1900 in the year 2000.
The Board of Directors early in 1997 assigned Year 2000 Project implementation
responsibility to the Electronic Data Processing (EDP) Steering Committee.
The EDP Steering Committee is comprised of the following members: President,
Executive Vice President, Vice President and Cashier, Vice President-Systems,
Vice President-Data Processing, and Assistant Vice President-Systems. The
committee meets at least quarterly with the meetings being reviewed by the
Board Audit Committee and progress reports made to the full Board. The CPA
firm of Tourville, Simpson, & Henderson has been engaged to assist in Year 2000
Plan development, implementation, and examination. J-Square, a Banker Software
consulting firm, has been retained to assist in the testing of core application
system software.
<PAGE> 24
YEAR 2000 (continued)
All systems used by the bank were identified and prioritized with a time line
established for projected dates of upgrades, replacement, certification, and
testing. The Remediation and Testing Plans are on schedule with all mission
critical systems having been replaced or upgraded to Year 2000 compliance.
Testing of all systems to ensure Year 2000 compliance is expected to be
completed by December 31, 1998. A Business Interruption Plan is in place to
establish additional contingency plans in the event of possible unforeseen
hardware or software failures. Anticipated Year 2000 costs are projected to be
approximately $276,000.00.
The potential risk of Year 2000 impact on large loan and deposit customers of
the bank has been assessed by loan and calling officers. In addition, The
Conway National Bank is scheduled to host meetings to help customers with their
Year 2000 concerns.
EXHIBITS AND REPORTS ON FORM 8-K
See Exhibit Index appearing below.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter covered by this report.
EXHIBIT INDEX
Exhibit
Number
27 Financial Data Schedule - Article 9 Financial Data Schedule for 10-
Q for electronic filers (pages 27 and 28).
All other exhibits, the filing of which are required with this Form, are not
applicable.
25
<PAGE>
CNB Corporation
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
(Registrant)
Paul R. Dusenbury
_________________________________________
Paul R. Dusenbury
Treasurer
(Chief Financial and Accounting Officer)
Date: November 12, 1998
26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MORE
DETAILED FINANCIAL STATEMENTS OF THE COMPANY AND SUBSIDIARY AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIALS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,684
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 25,875
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,893
<INVESTMENTS-CARRYING> 66,012
<INVESTMENTS-MARKET> 67,383
<LOANS> 227,210
<ALLOWANCE> 3,160
<TOTAL-ASSETS> 419,487
<DEPOSITS> 340,193
<SHORT-TERM> 33,527
<LIABILITIES-OTHER> 3,337
<LONG-TERM> 0
0
0
<COMMON> 5,987
<OTHER-SE> 36,443
<TOTAL-LIABILITIES-AND-EQUITY> 419,487
<INTEREST-LOAN> 15,636
<INTEREST-INVEST> 5,758
<INTEREST-OTHER> 1,084
<INTEREST-TOTAL> 22,478
<INTEREST-DEPOSIT> 8,544
<INTEREST-EXPENSE> 9,772
<INTEREST-INCOME-NET> 12,706
<LOAN-LOSSES> 525
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,418
<INCOME-PRETAX> 6,703
<INCOME-PRE-EXTRAORDINARY> 4,469
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,469
<EPS-PRIMARY> 7.48<F1>
<EPS-DILUTED> 7.48<F1>
<YIELD-ACTUAL> 4.51<F1>
<LOANS-NON> 44
<LOANS-PAST> 144
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 44
<ALLOWANCE-OPEN> 2,879
<CHARGE-OFFS> 479
<RECOVERIES> 235
<ALLOWANCE-CLOSE> 3,160
<ALLOWANCE-DOMESTIC> 3,160
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>MULTIPLIER DOES NOT APPLY TO EPS AND YIELD DATA.
</FN>
</TABLE>
