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 June 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 June 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 June 30, 1998 was 597,727.
<PAGE>
CNB Corporation
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1998, 1
December 31, 1997 and June 30, 1997
Consolidated Statement of Income for the Three Months 2
and Six Months Ended June 30, 1998 and 1997
Consolidated Statement of Comprehensive Income 3
for the Three Months and Six Months Ended
June 30, 1998 and 1997
Consolidated Statement of Changes in Stockholders' 4
Equity for the Six Months Ended June 30, 1998
and 1997
Consolidated Statement of Cash Flows for the Six Months 5
Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial 13-25
Condition and Results of Operations
Item 4. Submission of Matters to a Vote of Security Holders 25
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>
June 30, December 31, June 30,
1998 1997 1997
ASSETS:
<S> <C> <C> <C>
Cash and due from banks $ 16,057 $ 14,371 $ 15,981
Interest bearing deposits with banks 0 0 0
Investment Securities 62,304 70,239 68,734
(Fair values of $63,056 at
June 30, 1998, $70,893 at
December 31, 1997, and $68,834
at June 30, 1997)
Securities Available for Sale 65,240 53,184 62,184
(Amortized cost of $64,895 at
June 30, 1998, $52,855 at
December 31, 1997, and $62,186
at June 30, 1997)
Federal Funds sold and securities
purchased under agreement
to resell 30,825 11,375 14,350
Loans:
Gross Loans 233,613 222,826 207,786
Less unearned income (1,112) (1,105) (1,075)
Loans, net of unearned income 232,501 221,721 206,711
Less reserve for possible
loan losses (3,094) (2,879) (2,707)
Net loans 229,407 218,842 204,004
Bank premises and equipment 6,816 6,798 6,957
Other assets 7,043 6,335 6,344
Total assets 417,692 381,144 378,554
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing 68,590 55,422 60,455
Interest-bearing 269,150 245,905 243,344
Total deposits 337,740 310,327 303,799
Federal funds purchased and
securities sold under agreement
to repurchase 31,898 32,366 31,489
Other short-term borrowings 4,503 5,000 3,866
Other liabilities 3,052 4,707 2,540
Minority interest in subsidiary 29 27 26
Total liabilities 377,222 343,427 341,720
Stockholders' equity:
Common stock, par value $10 per
share: Authorized 1,500,000 in
1998 and 500,000 in 1997;
issued 598,687 in 1998 and
issued 479,093 in 1997 5,987 5,987 4,791
Surplus 24,552 24,552 15,701
Undivided Profits 9,812 7,030 16,348
Net Unrealized Holding 206 197 (2)
Gains (Losses) on
Available-For-Sale Securities
Less: Treasury stock (87) (49) (4)
Total stockholders' equity 40,470 37,717 36,834
Total liabilities
and stockholders' equity 417,692 381,144 378,554
</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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Interest Income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 5,250 $ 4,690 $ 10,343 $ 9,199
Interest on investment securities:
Taxable investment securities 1,762 1,825 3,449 3,582
Tax-exempt investment securities 170 176 349 356
Other securities 3 3 3 3
Interest on federal funds sold and securities
purchased under agreement to resell 369 170 597 299
Total interest income 7,554 6,864 14,741 13,439
Interest Expense:
Interest on deposits 2,876 2,509 5,618 4,875
Interest on federal funds purchased and
securities sold under agreement to
repurchase 389 395 787 810
Interest on other short-term borrowings 17 18 43 35
Total interest expense 3,282 2,922 6,448 5,720
Net interest income 4,272 3,942 8,293 7,719
Provision for possible loan losses 175 210 365 450
Net interest income after provision for
possible loan losses 4,097 3,732 7,928 7,269
Other income:
Service charges on deposit accounts 556 526 1,146 1,060
Gains/(Losses) on securities 0 0 0 0
Other operating income 407 293 633 479
Total other income 963 819 1,779 1,539
Other expenses:
Minority interest in income of subsidiary 1 1 2 2
Salaries and employee benefits 1,703 1,563 3,364 3,076
Occupancy expense 394 424 817 844
Other operating expenses 660 699 1,329 1,306
Total operating expenses 2,758 2,687 5,512 5,228
Income before income taxes 2,302 1,864 4,195 3,580
Income tax provision 756 712 1,413 1,315
Net Income 1,546 1,152 2,782 2,265
Per share data (1):
Net income per weighted average shares
outstanding $ 2.58 $ 1.93 $ 4.65 $ 3.79
Cash dividend paid per share $ 0 $ 0 $ 0 $ 0
Book value per actual number of shares
outstanding $ 67.71 $ 61.51 $ 67.71 $ 61.51
Weighted average number of shares outstanding 597,933 598,401 597,933 598,401
Actual number of shares outstanding 597,727 598,819 597,727 598,819
</TABLE>
(1) Adjusted for the effect of a 25% stock dividend issued during the third
quarter of 1997.
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 Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $1,546 $1,152 $2,782 $2,265
Other comprehensive income, net of tax
Unrealized gains/(losses)
on securities:
Unrealized holding gains/(losses) (49) 195 9 (29)
during period
Net Comprehensive Income $1,497 $1,347 $2,791 $2,236
</TABLE>
3
<PAGE>
CNB Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(All Dollar Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Common Stock:
$10 par value; 1,500,000 shares authorized in
1997 and 500,000 in 1996;
Balance, January 1 5,987 4,791
Issuance of Common Stock None None
Balance at end of period 5,987 4,791
Surplus:
Balance, January 1 24,552 15,697
Issuance of Common Stock None None
Gain on sale of treasury stock None 4
Balance at end of period 24,552 15,701
Undivided profits:
Balance, January 1 7,030 14,082
Net Income 2,782 2,265
Cash dividends declared None None
Balance at end of period 9,812 16,348
Net unrealized holding gains/(losses) on
available-for-sale securities:
Balance, January 1 197 27
Change in net unrealized gains/(Losses) 9 (29)
Balance at end of period 206 (2)
Treasury stock:
Balance, January 1 (49) (101)
Purchase of treasury stock (160) (12)
Reissue of treasury stock 122 109
Balance at end of period (87) (4)
Total stockholders' equity 40,470 36,834
</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 six-month period ended June 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,782 $ 2,265
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 329 324
Provision for loan losses 365 450
Provision for deferred income taxes (136) 70
Loss (gain) on sale of investment
securities 0 0
(Increase) decrease in accrued interest
receivable (670) (604)
(Increase) decrease in other assets (38) 70
(Decrease) increase in other liabilities 96 322
Increase in minority interest in
subsidiary 2 1
Net cash provided by operating
activities 2,730 2,898
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale 0 0
Proceeds from maturities of investment
securities held to maturity 11,715 10,875
Proceeds from maturities of investment
securities available for sale 4,944 6,500
Purchase of investment securities held to
maturity (3,780) (9,460)
Purchase of investment securities
available for sale (17,000) (6,546)
Decrease (increase) in interest-bearing
deposits in banks 0 0
(Increase) decrease in federal funds sold (19,450) (14,350)
(Increase) decrease in loans (10,780) (21,836)
Premises and equipment expenditures (347) (415)
Net cash provided by (used for)
investing activities (34,698) (35,232)
FINANCING ACTIVITIES
Dividends paid (1,794) (1,433)
Increase (Decrease) in deposits 36,413 35,386
(Decrease) increase in securities sold
under repurchase agreement (468) (1,529)
(Decrease) increase in other
short-term borrowings (497) 1,547
Increase (decrease)in obligation under
mortgages and capital leases 0 (6)
Net cash provided by (used for)
financing activities 33,654 33,965
Net increase (decrease) in cash
and due from banks 1,686 1,631
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 14,371 14,350
CASH AND DUE FROM BANKS, JUNE 30, 1998 AND 1997 $16,057 $15,981
CASH PAID (RECEIVED) FOR:
Interest $ 6,285 $ 5,358
Income taxes $ 1,344 $ 1,326
</TABLE>
5
<PAGE>
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 adjusted for the
effect of a 25% stock dividend paid during the third quarter of 1997,
597,933 for the six-month period ended June 30, 1998 and 598,401 for the
six-month period ended June 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 six-month period ended June 30, 1998 and
for the years ended December 31, 1997 and 1996 were approximately $6,418,
$5,909, and $5,112, respectively.
6
<PAGE>
NOTE 3 - INVESTMENT SECURITIES
Investment securities with a par value of approximately $80,904 at June 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 June 30, 1998 and at December 31, 1997.
<TABLE>
<CAPTION>
June 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 $ 9,291 $ 40 $ 2 $ 9,329 6.52%
One to five years 9,969 109 0 10,078 6.11
19,260 149 2 19,407 6.31
Federal agencies
Within one year 7,162 21 0 7,183 5.93
One to five years 38,032 204 35 38,201 6.04
45,194 225 35 45,384 6.02
State, county and
municipal
Within one year 0 0 0 0 -
One to five years 325 8 0 333 7.85
325 8 0 333 7.85
Other Securities(Equity) 116 0 0 116 -
Total available for sale $64,895 $ 382 $ 37 $65,240 6.10%
HELD TO MATURITY
United States Treasury
Within one year 11,681 40 8 11,713 5.61%
One to five years 7,004 78 0 7,082 6.26
18,685 118 8 18,795 5.85
Federal agencies
Within one year 1,029 0 3 1,026 5.48%
One to five years 29,252 320 9 29,563 6.25
30,281 320 12 30,589 6.23
State, county and
municipal
Within one year 1,228 20 0 1,248 9.55%
One to five years 6,616 173 2 6,787 8.10
Six to ten years 5,339 141 0 5,480 7.43
After ten years 155 2 0 157 7.44
13,338 336 2 13,672 7.96
Total held to maturity $62,304 $ 774 $ 22 $63,056 6.48%
</TABLE>
(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended June 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 $206 as of June 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 June 30, 1998 and December 31,
1997 by major classification:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Real estate loans - mortgage $ 140,378 $ 136,441
- construction 16,953 19,653
Commercial and industrial loans 41,064 34,606
Loans to individuals for household,
family and other consumer expenditures 32,356 30,772
Agriculture 2,697 1,214
All other loans, including overdrafts 165 140
Gross loans 233,613 222,826
Less unearned income (1,112) (1,105)
Less reserve for loan losses (3,094) (2,879)
Net loans 229,407 218,842
</TABLE>
9
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, continued
Changes in the reserve for loan losses for the quarter ended and six-
month period ended June 30, 1998 and 1997 and the year ended December 31,
1997 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended December
June 30, June 30, 31,
1998 1997 1998 1997 1997
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 3,014 $ 2,534 $ 2,879 $ 2,370 $ 2,370
Charge-offs:
Commercial, financial,
and agricultural 25 36 71 64 238
Real Estate - construction
and mortgage 9 4 10 4 5
Loans to individuals 109 76 225 157 399
Total charge-offs $ 143 $ 116 $ 306 $ 225 $ 642
Recoveries:
Commercial, financial, and
agricultural $ 4 $ 17 $ 34 $ 22 $ 100
Real Estate - construction
and mortgage 3 14 4 14 106
Loans to individuals 41 48 118 76 145
Total recoveries $ 48 $ 79 $ 156 $ 112 $ 351
Net charge-offs/(recoveries) $ 95 $ 37 $ 150 $ 113 $ 291
Additions charge to operations $ 175 $ 210 $ 365 $ 450 $ 800
Balance, end of period $ 3,094 $ 2,707 $ 3,094 $ 2,707 $ 2,879
Ratio of net charge-offs during
the period to average loans
outstanding during the period .05% .02% .07% .06% .14%
</TABLE>
The entire balance is available to absorb future loan losses.
At June 30, 1998 and December 31, 1997 loans on which no interest was being
accrued totalled approximately $22 and $24, respectively and foreclosed
real estate totalled $0 and $16, respectively; and loans 90 days past due
and still accruing totalled $109 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 U.S. subsidiary. Subsequently, on October 23,
1996, a plan of Rehabilitation for Confederation Life Insurance Company (US)
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 June 30, 1998, the Company does not have any other 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 June 30, 1998 and December 31, 1997 is summarized as
follows:
June 30, December 31,
1998 1997
Land and buildings $ 8,949 $ 8,853
Furniture, fixtures and equipment 5,320 5,313
Construction in progress 82 2
$ 14,351 $ 14,168
Less accumulated depreciation and
amortization 7,535 7,370
$ 6,816 $ 6,798
Depreciation and amortization of bank premises and equipment charged
to operating expense was $157 and $329 for the quarter ended and the six
month period ended June 30, 1998, respectively and $700 for the year ended
December 31, 1997.
NOTE 6 - CERTIFICATES OF DEPOSIT IN EXCESS OF $100,000
At June 30, 1998 and December 31, 1997, certificates of deposit of
$100,000 or more included in time deposits totaled approximately $64,238
and $56,305 respectively. Interest expense on these deposits was
approximately $883 and $1,757 for the quarter ended and the six-month
period ended June 30, 1998 and $2,815 for the year ended December 31, 1997.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At June 30, 1998 and December 31, 1997, securities sold under
repurchase agreements totaled approximately $31,898 and $32,366. U.S.
Government securities with a book value of $40,968 ($41,300 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 June 30, 1998 and December 31, 1997.
NOTE 8 - LINES OF CREDIT
At June 30, 1998, the Bank had unused short-term lines of credit to
purchase Federal Funds from unrelated banks totaling $19,000. 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 $6,891 at June 30,
1998. The amount outstanding under the note totaled $4,503 and $5,000 at
June 30, 1998 and December 31, 1997, respectively.
NOTE 9 - INCOME TAXES
Income tax expense for the quarter ended June 30, 1998 and June 30,
1997 on pretax income of $2,302 and $1,864 totalled $756 and $712
respectively. Income tax expense for the six-month period ended June 30,
1998 and June 30, 1997 on pretax income of $4,195 and $3,580 totalled
$1,413 and $1,315 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 June 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 June
30, 1998, commitments to extend credit totalled $21,710; financial standby
letters of credit totalled $67; and performance standby letters of credit
totalled $728. 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 six month period ended June 30, 1998 and years ended
December 31, 1997, 1996 and 1995, $94, $187, $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 June 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 $41,351 16.92% $19,556 8.0% $24,445 10.0%
weighted assets)
Tier I Capital (to risk 38,295 15.67 9,778 4.0 14,667 6.0
weighted assets)
Tier I Capital (to avg. 38,295 9.51 16,109 4.0 20,136 5.0
assets)
12
<PAGE>
NOTE 13 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of CNB Corporation
(parent company only):
CONDENSED BALANCE SHEET
JUNE 30, 1998
(Unaudited)
ASSETS
Cash $ 1,716
Investment in subsidiary 38,472
Fixed assets 245
Other assets 37
$ 40,470
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liability $ 0
Stockholders' equity 40,470
$ 40,470
CONDENSED STATEMENT OF INCOME
For the six-month period ended June 30, 1998
(Unaudited)
EQUITY IN NET INCOME OF SUBSIDIARY $ 2,818
OTHER INCOME 0
OTHER EXPENSES (36)
Net Income $ 2,782
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 increased 12.5% from $206,711 at June 30, 1997 to $232,501 at June 30,
1998 and have increased as a percentage of total assets from 54.6% to 55.7%
over the same period as loan demand has remained solid in our market.
Correspondingly, securities and federal funds sold have decreased as a
percentage of total assets from 38.4% at June 30, 1997 to 37.9% at June 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 increased slightly as a percentage of total assets from
16.0% at June 30, 1997 to 16.4% at June 30, 1998. However, 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 64.3% of
total assets at June 30, 1997 to 64.5% at June 30, 1998 while securities
sold under agreement to repurchase have decreased from 8.3% to 7.6% 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 June 30,
1998 and 1997:
<TABLE>
<CAPTION>
June 30,
<S> <C> <C>
Assets: 1998 1997
Earning assets:
Loans, net of unearned income 55.7% 54.6%
Investment securities 14.9 18.2
Securities Available for Sale 15.6 16.4
Federal funds sold and securities purchased
under agreement to resell 7.4 3.8
Other earning assets - -
Total earning assets 93.6 93.0
Other assets 6.4 7.0
Total assets 100.0% 100.0%
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits 64.5% 64.3%
Federal funds purchased and securities sold
under agreement to repurchase 7.6 8.3
Other short-term borrowings 1.1 1.0
Total interest-bearing liabilities 73.2 73.6
Noninterest-bearing deposits 16.4 16.0
Other liabilities .7 .7
Stockholders' equity 9.7 9.7
Total liabilities and stockholders' equity 100.0% 100.0%
</TABLE>
14
<PAGE>
RESULTS OF OPERATION
CNB Corporation experienced earnings for the three-month period ended
June 30, 1998 and 1997 of $1,546 and $1,152, respectively, resulting in a
return on average assets of 1.50% and 1.23% and a return on average
stockholders' equity of 15.57% and 12.83%.
CNB Corporation experienced earnings for the six-month period ended June
30, 1998 and 1997 of $2,782 and $2,265, respectively, resulting in a return
on average assets of 1.38% and 1.24% and a return on average stockholders'
equity of 14.25% and 12.99%.
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 $39,138 or
10.3% from $378,554 at June 30, 1997 to $417,692 at June 30, 1998. The
following table sets forth the financial highlights for the three-month and
six-month periods ending June 30, 1998 and June 30, 1997:
CNB Corporation
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
<TABLE>
<CAPTION>
Three-Month Period Six-Month Period
Ended June 30, Ended June 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 4,097 3,732 9.8% 7,928 7,269 9.1%
Income before income taxes 2,302 1,864 23.5 4,195 3,580 17.2
Net Income 1,546 1,152 34.2 2,782 2,265 22.8
Per Share(1) 2.58 1.93 33.7 4.65 3.79 22.7
Cash dividends declared 0 0 - 0 0 -
Per Share(1) 0 0 - 0 0 -
Total assets 417,692 378,554 10.3% 417,692 378,554 10.3%
Total deposits 337,740 303,799 11.2 337,740 303,799 11.2
Loans, net of unearned income 232,501 206,711 12.5 232,501 206,711 12.5
Investment securities and
securities available for
sale 127,544 130,918 (2.6) 127,544 130,918 (2.6)
Stockholders' equity 40,470 36,834 9.9 40,470 36,834 9.9
Book value per share(1) 67.71 61.51 10.1 67.71 61.51 10.1
Ratios (2):
Annualized return on average
total assets 1.50% 1.23% 22.0% 1.38% 1.24% 11.3%
Annualized return on average
stockholders' equity 15.57% 12.83% 21.4% 14.25% 12.99% 9.7%
</TABLE>
(1) Adjusted for the effect of a 25% stock dividend issued during the third
quarter of 1997.
(2) For the three-month period ended June 30, 1998 and June 30, 1997,
average total assets amounted to $412,179 and $373,364 with average
stockholders' equity totaling $39,714 and $35,903, respectively. For
the six-month period ended June 30, 1998 and June 30, 1997, average
total assets amounted to $403,115 and $365,981 with average
stockholders' equity totaling $39,049 and $34,860, 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 six-month periods ended June 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 8.1% increase from $4,032
for the three-month period ended June 30, 1997 to $4,360 for the
three-month period ended June 30, 1998. During the same period, total
fully-tax-equivalent interest income increased by 9.9% from $6,954 to
$7,642 and total interest expense increased by 12.3% from $2,922 to $3,282.
Fully-tax-equivalent net interest income as a percentage of total earning
assets has shown a decrease of .11% from 4.63% for the three-month period
ended June 30, 1997 to 4.52% for the three-month period ended June 30,
1998.
Fully-tax-equivalent net interest income showed a 7.2% increase from $7,902
for the six-month period ended June 30, 1997 to $8,473 for the six-month
period ended June 30, 1998. During the same period, total fully-tax-
equivalent interest income increased by 9.5% from $13,622 to $14,921 and
total interest expense increased by 12.7% from $5,720 to $6,448. Fully-tax-
equivalent net interest income as a percentage of total earning assets has
shown a decrease of .13% from 4.62% for the six-month period ended June 30,
1997 to 4.49% for the six-month period ended June 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 6/30/98 Three Months Ended 6/30/97
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 $230,100 $ 5,250 9.13% $202,950 $ 4,690 9.24%
Securities:
Taxable 115,790 1,765 6.10 119,752 1,828 6.11
Tax-exempt 13,381 258 7.71 13,542 266 7.86
Federal funds sold and
securities purchased under
agreement to resell 26,840 369 5.50 12,456 170 5.46
Other earning assets 0 0 - 0 0 -
Total earning assets 386,111 7,642 7.92 348,700 6,954 7.98
Other assets 26,068 24,664
Total assets $412,179 $373,364
Liabilities and stockholders equity:
Interest-bearing liabilities:
Interest-bearing deposits $266,926 2,876 4.31 $241,654 $ 2,509 4.15
Federal funds purchased and
securities sold under
agreement to repurchase 34,561 389 4.50 33,799 395 4.67
Other short-term borrowings 1,661 17 4.09 1,555 18 4.63
Obligations under mortgages
and capitalized leases 0 0 - 2 0 8.00
Total interest-bearing
Liabilities $303,148 $ 3,282 4.33 $ 77,010 $ 2,922 4.22
Noninterest-bearing deposits 65,777 58,252
Other liabilities 3,540 2,199
Stockholders' equity 39,714 35,903
Total liabilities and
stockholders' equity $412,179 $373,364
Net interest income as a percent
of total earning assets $386,111 $ 4,360 4.52 $348,700 $ 4,032 4.63
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 88 $ 90
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Ratios:
Annualized return on average total assets 1.50 1.23
Annualized return on average stockholders' equity 15.57 12.83
Cash dividends declared as a percent of net income 0 0
Average stockholders' equity as a percent of:
Average total assets 9.64 9.62
Average total deposits 11.94 11.97
Average loans, net of unearned income 17.26 17.69
Average earning assets as a percent of
average total assets 93.68 93.39
</TABLE>
17
<PAGE>
CNB Corporation and Subsidiary
Selected Financial Data
<TABLE>
<CAPTION>
Six Months Ended 6/30/98 Six Months Ended 6/30/97
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 $227,016 $10,343 9.11% $196,909 $ 9,199 9.34%
Securities:
Taxable 113,842 3,452 6.06 119,482 3,585 6.00
Tax-exempt 13,612 529 7.77 13,747 539 7.84
Federal funds sold and
securities purchased under
agreement to resell 23,157 597 5.16 11,628 299 5.14
Other earning assets 0 0 - 0 0 -
Total earning assets 377,627 14,921 7.90 341,766 13,622 7.97
Other assets 25,488 24,215
Total assets $403,115 $365,981
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Interest-bearing deposits $262,355 5,618 4.28 $237,663 $ 4,875 4.10
Federal funds purchased and
securities sold under
agreement to repurchase 34,912 787 4.51 34,872 810 4.65
Other short-term borrowings 1,566 43 5.49 1,396 35 5.01
Obligations under mortgages
and capitalized leases 0 0 - 3 0 8.00
Total interest-bearing
liabilities $298,833 $ 6,448 4.32 $273,934 $ 5,720 4.18
Noninterest-bearing deposits 61,792 54,299
Other liabilities 3,441 2,888
Stockholders' equity 39,049 34,860
Total liabilities and
stockholders' equity $403,115 $365,981
Net interest income as a
percent of total earning
assets $377,627 $ 8,473 4.49 $341,766 $ 7,902 4.62
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 180 $ 183
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Ratios:
Annualized return on average total assets 1.38 1.24
Annualized return on average stockholders' equity 14.25 12.99
Cash dividends declared as a percent of net income 0 0
Average stockholders' equity as a percent of:
Average total assets 9.69 9.53
Average total deposits 12.05 11.94
Average loans, net of unearned income 17.20 17.70
Average earning assets as a percent of
average total assets 93.68 93.38
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Three Months Ended June 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) 230,100 202,950 9.13% 9.24% 5,250 4,690 560 (56) 624 (8)
Investment securities:
Taxable 115,790 119,752 6.10% 6.11% 1,765 1,828 (63) (3) (61) 1
Tax-exempt 13,381 13,542 7.71% 7.86% 258 266 (8) (5) (3) -
Federal funds sold and
securities purchased under
agreement to resell 26,840 12,456 5.50% 5.46% 369 170 199 1 196 2
Other earning assets 0 0 - - 0 0 - - - -
Total Earning Assets 386,111 348,700 7.92% 7.98% 7,642 6,954 688 (63) 756 (5)
Interest-bearing Liabilities:
Interest-bearing deposits 266,926 241,654 4.31% 4.15% 2,876 2,509 367 97 260 10
Federal funds purchased and
securities sold under
agreement to repurchase 34,561 33,799 4.50% 4.67% 389 395 (6) (14) 8 -
Other short-term borrowings 1,661 1,555 4.09% 4.63% 17 18 (1) (2) 1 -
Mortgage indebtedness and
obligations under capital-
ized leases 0 2 - 8.00% 0 0 - - - -
Total Interest-bearing
Liabilities 303,148 277,010 4.33% 4.22% 3,282 2,922 360 81 269 10
Interest-free Funds
Supporting Earning Assets 82,963 71,690
Total Funds Supporting
Earning Assets 386,111 348,700 3.40% 3.35% 3,282 2,922 360 81 269 10
Interest Rate Spread 3.59% 3.76%
Impact of Non-interest-bearing
Funds on Net Yield on Earning
Assets .93% .87%
Net Yield on Earning Assets 4.52% 4.63% 4,360 4,032
</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 Six Months Ended June 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) 227,016 196,909 9.11% 9.34% 10,343 9,199 1,144 (226) 1,405 (35)
Investment securities:
Taxable 113,842 119,482 6.06% 6.00% 3,452 3,585 (133) 36 (167) (2)
Tax-exempt 13,612 13,747 7.77% 7.84% 529 539 (10) (5) (5) -
Federal funds sold and
securities purchased under
agreement to resell 23,157 11,628 5.16% 5.14% 597 299 298 1 296 1
Other earning assets 0 0 - - 0 0 - - - -
Total Earning Assets 377,627 341,766 7.90% 7.97% 14,921 13,622 1,299 (194) 1,529 (36)
Interest-bearing Liabilities:
Interest-bearing deposits 262,355 237,663 4.28% 4.10% 5,618 4,875 743 214 507 22
Federal funds purchased and
securities sold under
agreement to repurchase 34,912 34,872 4.51% 4.65% 787 810 (23) (24) 1 -
Other short-term borrowings 1,566 1,396 5.49% 5.01% 43 35 8 3 4 1
Mortgage indebtedness and
obligations under capital-
ized leases 0 3 - 8.00% 0 0 - - - -
Total Interest-bearing
Liabilities 298,833 273,934 4.32% 4.18% 6,448 5,720 728 193 512 23
Interest-free Funds
Supporting Earning Assets 78,794 67,832
Total Funds Supporting
Earning Assets 377,627 341,766 3.41% 3.35% 6,448 5,720 728 193 512 23
Interest Rate Spread 3.58% 3.79%
Impact of Non-interest-bearing
Funds on Net Yield on Earning
Assets .91% .83%
Net Yield on Earning Assets 4.49% 4.62% 8,473 7,902
</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 $175 for the three-month period
ended June 30, 1998 and $210 for the three-month period ended June 30,
1997. Net loan charge-offs/(recoveries) totaled $95 for the three-month
period ended June 30, 1998 and $37 for the same period in 1997.
The provision for possible loan losses was $365 for the six-month period
ended June 30, 1998 and $450 for the six-month period ended June 30, 1997.
Net loan charge-offs/(recoveries) totaled $150 for the six-month period
ended June 30, 1998 and $113 for the same period in 1997.
The reserve for possible loan losses as a percentage of net loans was
1.35% at June 30, 1998 and 1.33% at June 30, 1997. The decreased
provision during the three-month and six-month period ended June 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
half of 1998 or 1997. At June 30, 1998, December 31, 1997, and June 30,
1997 market value appreciation/(depreciation) in the securities portfolio
totaled $1,097, $983, and $98. 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 17.6% from $819 for the three-month period ended
June 30, 1997 to $963 for the three-month period ended June 30, 1998.
Other income, net of any gains/losses on security transactions, increased
by 15.6% from $1,539 for the six-month period ended June 30, 1997 to $1,779
for the six-month period ended June 30, 1998.
This increase in the three-month and six-month period ended June 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 2.6% from $2,687 for the
three-month period ended June 30, 1997 to $2,758 for the three-month period
ended June 30, 1998. The major components of other expenses are salaries
and employee benefits which increased 9.0% from $1,563 to $1,703;
occupancy expense which decreased 7.1% from $424 to $394; and other
operating expenses which decreased by 5.6% from $699 to $660.
Occupancy expense has decreased slightly as depreciation expense has
remained flat at $157 during the second quarter of 1997 and 1998. Salaries
and employee benefits expense has increased due to an increase of full-
time-equivalent employees from 184 at June 30, 1997 to 196 at June 30, 1998
as the bank prepares to open the new "West Conway Office" in the fall of
1998.
21
<PAGE>
Other Expenses (continued) - Other expenses increased by 5.4% from $5,228
for the six-month period ended June 30, 1997 to $5,512 for the six-month
period ended June 30, 1998. The major components of other expenses are
salaries and employee benefits which increased 9.4% from $3,076 to $3,364;
occupancy expense which decreased 3.2% from $844 to $817; and other
operating expense which increased by 1.8% from $1,306 to $1,329. Occupancy
expense has shown a slight decline as depreciation expense has increased
only 1.5% from $324 during the first half of 1997 to $329 for the same
period in 1998. Salaries and employee benefits expenses increased due to
the afore-mentioned increase in full-time-equivalent employees.
Income Taxes - Provisions for income taxes increased 6.2% from $712 for the
three-month period ended June 30, 1997 to $756 for the three-month period
ended June 30, 1998. Income before income taxes less interest on
tax-exempt investment securities increased by 26.3% from $1,688 for the
three-month period ended June 30, 1997 to $2,132 for the same period in
1998. State tax liability increased as income before income taxes
increased 23.5% from $1,864 to $2,302 during the same period.
Provisions for income taxes increased 7.5% from $1,315 for the six-month
period ended June 30, 1997 to $1,413 for the six-month period ended June
30, 1998. Income before income taxes less interest on tax-exempt investment
securities increased by 19.3% from $3,224 for the six-month period ended
June 30, 1997 to $3,846 for the same period in 1998 and state tax liability
increased as income before income taxes increased 17.2% from $3,580 to
$4,195 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
liquidity sources are more than adequate to meet funding needs.
CAPITAL RESOURCES
Total stockholders' equity was $40,470, $37,717, $34,496, and $32,195 at
June 30, 1998, December 31, 1997, December 31, 1996, and December 31, 1995,
representing 9.69%, 9.90%, 10.09%, and 9.91% of total assets, respectively.
At June 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.
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.
22
<PAGE>
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.
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.
23
<PAGE>
ACCOUNTING ISSUES (continued)
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.
All systems used by the bank were identified and prioritized with a time
line established for projected dates of upgrades, replacement,
certification, and testing. All mission critical systems have been
upgraded or replaced. Testing of all systems to ensure Year 2000
compliance is expected to be completed by December 31, 1998. Anticipated
Year 2000 costs are projected to be approximately $276,000.
24
<PAGE>
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of shareholders of CNB Corporation was held in the main
office building of The Conway National Bank at 1400 Third Avenue, Conway,
South Carolina, at 4:15 p.m., Conway, South Carolina time, on May 12, 1998.
The purpose of the Annual Meeting was to: (1) elect four Directors; and (2)
ratify the appointment of Elliott, Davis, and Company, Certified Public
Accountants, as the Company's independent public accountant for the fiscal
year ending December 31, 1998.
Proxies for the meeting were solicited pursuant to Regulation 14 under the
Act; there was no solicitation in opposition to the management's nominees
as listed in the proxy statement; and all of such nominees were elected.
There were 391,994 of the 597,857 shares issued present or represented by
proxy and all shares were voted for the election of the four Directors
listed as management's nominees in the proxy statement; and for the
ratification of Elliott, Davis, and Company as the Company's 1998
independent public accountant.
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: August 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,057
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 30,825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,240
<INVESTMENTS-CARRYING> 62,304
<INVESTMENTS-MARKET> 63,056
<LOANS> 232,501
<ALLOWANCE> 3,094
<TOTAL-ASSETS> 417,692
<DEPOSITS> 337,740
<SHORT-TERM> 36,401
<LIABILITIES-OTHER> 3,081
<LONG-TERM> 0
0
0
<COMMON> 5,987
<OTHER-SE> 34,483
<TOTAL-LIABILITIES-AND-EQUITY> 417,692
<INTEREST-LOAN> 10,343
<INTEREST-INVEST> 3,798
<INTEREST-OTHER> 600
<INTEREST-TOTAL> 14,741
<INTEREST-DEPOSIT> 5,618
<INTEREST-EXPENSE> 6,448
<INTEREST-INCOME-NET> 8,293
<LOAN-LOSSES> 365
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,512
<INCOME-PRETAX> 4,195
<INCOME-PRE-EXTRAORDINARY> 2,782
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,782
<EPS-PRIMARY> 4.65<F1>
<EPS-DILUTED> 4.65<F1>
<YIELD-ACTUAL> 4.49<F1>
<LOANS-NON> 22
<LOANS-PAST> 109
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 22
<ALLOWANCE-OPEN> 2,879
<CHARGE-OFFS> 306
<RECOVERIES> 156
<ALLOWANCE-CLOSE> 3,094
<ALLOWANCE-DOMESTIC> 3,094
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>MULTIPLIER DOES NOT APPLY TO EPS AND YIELD DATA.
</FN>
</TABLE>
