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 March 31, 2002
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 EndedMarch 31, 2002 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 29528
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (843) 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 March 31, 2002 was 716,904.
CNB Corporation
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2002, 1
December 31, 2001 and March 31, 2001
Consolidated Statement of Income for the Three Months 2
Ended March 31, 2002 and 2001
Consolidated Statement of Comprehensive Income 3
for the Three Months Ended March 31, 2002 and 2001
Consolidated Statement of Changes in Stockholders' 4
Equity for the Three Months Ended March 31, 2002
and 2001
Consolidated Statement of Cash Flows for the Three Months 5
Ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial 13-21
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 23
CNB Corporation and Subsidiary
Consolidated Balance Sheets
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
ASSETS:
Cash and due from banks
Interest bearing deposits with banks
Investment Securities
(Fair values of $20,746 at
March 31, 2002, $21,312 at
December 31, 2001, and $34,170
at March 31, 2001)
Securities Available for Sale
(Amortized cost of $138,623 at
March 31, 2002, $137,615 at
December 31, 2001, and $103,829
at March 31, 2001)
Federal Funds sold and securities
purchased under agreement
to resell
Loans:
Loans
Less reserve for possible
loan losses
Net loans
Bank premises and equipment
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing
Interest-bearing
Total deposits
Federal funds purchased and
securities sold under agreement
to repurchase
Other short-term borrowings
Other liabilities
Total liabilities
Stockholders' equity:
Common stock, par value $10 per
share: Authorized 1,500,000 in
2002 and 2001; issued 718,246
in 2002 and 2001
Surplus
Undivided Profits
Net Unrealized Holding
Gains (Losses) on
Available-For-Sale Securities
Less: Treasury stock
Total stockholders' equity
Total liabilities
and stockholders' equity | March 31,
2002
$ 21,158
0
20,259
139,347
38,075
303,728
(3,885)
299,843
11,168
9,176
$539,026
$ 87,213
359,440
446,653
28,350
5,690
3,397
484,090
7,182
34,779
12,682
434
(141)
54,936
$539,026 | December 31,
2001
$ 27,895
0
20,705
140,007
3,950
296,607
(3,763)
292,844
11,285
9,039
$505,725
$ 88,995
321,648
410,643
32,821
2,138
6,127
451,729
7,182
34,774
10,826
1,435
(221)
53,996
$505,725 | March 31,
2001
$ 18,573
0
33,550
105,099
26,625
297,268
(3,816)
293,452
11,463
9,408
$498,170
$ 77,078
335,614
412,692
27,857
2,403
4,620
447,572
7,182
34,746
8,263
762
(355)
50,598
$498,170 |
- -1-
CNB Corporation and Subsidiary
Consolidated Statement of Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
Interest Income:
Interest and fees on loans
Interest on investment securities:
Taxable investment securities
Tax-exempt investment securities
Interest on federal funds sold and securities
purchased under agreement to resell
Total interest income
Interest Expense:
Interest on deposits
Interest on federal funds purchased and securities
sold under agreement to repurchase
Interest on other short-term borrowings
Total interest expense
Net interest income
Provision for possible loan losses
Net interest income after provision for possible
loan losses
Other income:
Service charges on deposit accounts
Gains/(Losses) on securities
Other operating income
Total other income
Other expenses:
Salaries and employee benefits
Occupancy expense
Other operating expenses
Total operating expenses
Income before income taxes
Income tax provision
Net income
Per share data:
Net income per weighted average shares
outstanding
Cash dividend paid per share
Book value per actual number of shares
outstanding
Weighted average number of shares outstanding
Actual number of shares outstanding
| Three Months Ended
March 31, |
2002
$ 5,571
1,729
285
63
7,648
2,175
136
35
2,346
5,302
275
5,027
777
183
392
1,352
2,363
487
835
3,685
2,694
838
$ 1,856
$ 2.59
$ 0
$ 76.63
716,680
716,904 | 2001
$ 6,691
1,579
230
407
8,907
4,010
343
51
4,404
4,503
190
4,313
709
0
424
1,133
2,180
483
802
3,465
1,981
615
$ 1,366
$ 1.91
$ 0
$ 70.80
714,790
714,616 |
- -2-
CNB Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
Net Income
| Three Months
Ended
March 31, |
2002 | 2001 |
$1,856
|
$1,366
|
Other comprehensive income, net of tax
Unrealized gains/(losses)
on securities:
Unrealized holding gains/(losses)
during period |
(1,001)
|
664
|
Net Comprehensive Income
|
$ 855 |
$2,030 |
- -3-
CNB Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(All Dollar Amounts in Thousands)
(Unaudited)
Common Stock:
($10 par value; 1,500,000 shares authorized)
Balance, January 1
Issuance of Common Stock
Balance at end of period
| Three Months Ended
March 31, |
2002 | 2001 |
$ 7,182
None
7,182
|
$ 7,182
None
7,182
|
Surplus:
Balance, January 1
Issuance of Common Stock
Gain on sale of Treasury stock
Balance at end of period
|
34,774
None
5
34,779
|
34,732
None
14
34,746
|
Undivided profits:
Balance, January 1
Net Income
Cash dividends declared
Balance at end of period
|
10,826
1,856
None
12,682
|
6,898
1,366
None
8,263
|
Net unrealized holding gains/(losses) on
Available-for-sale securities:
Balance, January 1
Change in net unrealized gains/(losses)
Balance at end of period
|
1,435
(1,001)
434
|
98
664
762
|
Treasury stock:
Balance, January 1
(2,134 shares in 2002; 3,256 shares in 2001)
Purchase of treasury stock
Reissue of treasury stock
Balance at end of period
(1,342 shares in 2002; 3,630 shares in 2001)
Total stockholders' equity
|
(221)
(45)
125
(141)
$54,936
|
(304)
(156)
105
(355)
$50,598
|
Note: Columns may not add due to rounding
- -4-
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation
Provision for loan losses
Provision for deferred income taxes
Loss (gain) on sale of investment
securities
(Increase) decrease in accrued interest
receivable
(Increase) decrease in other assets
(Decrease) increase in other liabilities
| For the three-month period ended
March 31,
2002 2001 |
$ 1,856
160
275
(667)
0
220
(147)
834
|
$ 1,366
156
190
443
0
122
(1,598)
534
|
Net cash provided by operating
activities |
2,531
|
1,213
|
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale
Proceeds from maturities of investment
securities held to maturity
Proceeds from maturities of investment
securities available for sale
Purchase of investment securities
available for sale
(Increase) decrease in federal funds sold
(Increase) decrease in loans
Premises and equipment expenditures
|
6,017
446
8,974
(16,000)
(34,125)
(7,121)
(43)
|
0
8,665
15,057
(30,075)
(16,750)
(1,620)
(1,824)
|
Net cash used for investing activities
|
(41,852)
|
(26,547)
|
FINANCING ACTIVITIES
Dividends paid
Increase (Decrease) in deposits
(Decrease) increase in securities sold
under repurchase agreement
(Decrease) increase in other
short-term borrowings |
(2,507)
36,010
(4,471)
3,552
|
(2,503)
21,962
5,290
(1,081)
|
Net cash provided by (used for)
financing activities
Net increase (decrease) in cash
and due from banks
CASH AND DUE FROM BANKS, BEGINNING OF YEAR
CASH AND DUE FROM BANKS, March 31, 2002 AND 2001
CASH PAID (RECEIVED) FOR:
Interest
Income taxes
|
32,584
(6,737)
27,895
$ 21,158
$ 2,892
$ 135
|
23,668
(1,666)
20,239
$ 18,573
$ 3,918
$ 144
|
- -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, 716,680 for the three-month period ended March 31, 2002 and 714,790 for the three-month period ended March 31, 2000.
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 three-month period ended March 31, 2002 and for the years ended December 31, 2001 and 2000 were approximately $9,318, $9,103, and $8,852, respectively.
-6-
NOTE 3 - INVESTMENT SECURITIES
Investment securities with a par value of approximately $83,800 at March 31, 2002 and $76,640 at December 31, 2001 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 March 31, 2002 and at December 31, 2001.
March 31, 2002
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1) |
AVAILABLE FOR SALE
United States Treasury
|
$ 0 |
$ -
|
$ -
|
$ 0
|
-%
|
Federal agencies
Within one year
One to five years
Six to ten years
|
10,023
99,580
12,602
122,205
|
152
1,046
66
1,264
|
- -
584
13
597
|
10,175
100,042
12,655
122,872
|
5.83
5.33
5.80
5.42
|
State, county and
municipal
One to five years
Six to ten years
After ten years
Other Securities
Total available for sale |
4,897
11,010
231
16,138
280
$138,623
|
68
154
-
222
-
$1,486
|
29
129
7
165
-
$ 762
|
4,936
11,035
224
16,195
280
$139,347
|
5.53
5.91
5.91
5.80
-
5.46%
|
HELD TO MATURITY
United States Treasury
|
$ 0
|
$ -
|
$ -
|
$ 0
|
-%
|
Federal agencies
Within one year
One to Five years
|
5,008
5,002
10,010
|
60
149
209
|
- -
-
-
|
5,068
5,151
10,219
|
5.59
6.94
6.26
|
State, county and
municipal
Within one year
One to five years
Six to ten years
Total held to maturity |
2,758
4,766
2,725
10,249
$ 20,259
|
46
168
69
283
$ 492
|
- -
- -
5
5
$ 5
|
2,804
4,934
2,789
10,527
$ 20,746
|
5.98
6.50
6.36
6.32
6.29%
|
(1) Tax equivalent adjustment based on a 34% tax rate
As of the quarter ended March 31, 2002, 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 $434 as of March 31, 2002.
-7-
NOTE 3 - INVESTMENT SECURITIES (Continued)
March 31, 2002
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1) |
AVAILABLE FOR SALE
United States Treasury
|
$ 0
|
$ -
|
$ -
|
$ 0
|
-%
|
Federal agencies
Within one year
One to five years
Six to ten years
|
9,927
96,652
14,612
121,191
|
173
2,050
328
2,551
|
- -
174
-
174
|
10,100
98,528
14,940
123,568
|
5.60
5.46
5.76
5.51
|
State, county and
municipal
One to five years
Six to ten years
After ten years
Other -
CRA Qualified Investment
Fund
Total available for sale
|
3,652
11,640
854
16,146
278
$137,615
|
48
149
3
200
-
$2,751
|
29
146
10
185
-
$ 359
|
3,671
11,643
847
16,161
278
$140,007
|
5.38
5.89
6.34
5.80
-
5.54%
|
HELD TO MATURITY
United States Treasury
|
$ 0
|
$ -
|
$ -
|
$ 0
|
-%
|
Federal agencies
Within one year
One to Five years
|
3,013
7,011
10,024
|
31
295
326
|
- -
-
-
|
3,044
7,306
10,350
|
5.07
6.77
6.26
|
State, county and
municipal
Within one year
One to five years
Six to ten years
Total held to maturity |
1,570
5,931
3,180
10,681
$ 20,705
|
20
187
80
287
$ 613
|
- -
- -
6
6
$ 6
|
1,590
6,118
3,254
10,962
$ 21,312
|
5.88%
6.39
6.39
6.31
6.29%
|
(1) Tax equivalent adjustment based on a 34% tax rate
As of the quarter ended December 31, 2001, 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 $1,435 as of December 31, 2001.
-8-
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans at March 31, 2002 and December 31, 2001 by major classification:
March 31, December 31,
2002 2001 |
Real estate loans - mortage
- construction
Commercial and industrial loans
Loans to individuals for household,
family and other consumer expenditures
Agriculture
All other loans, including overdrafts
Gross loans
Less reserve for loan losses
Net loans |
$193,628
27,930
48,265
30,384
1,812
1,709
303,728
(3,885)
$299,843 | $187,808
28,324
44,351
32,008
1,316
2,800
296,607
(3,763)
$292,844 |
- -9-
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, continued
Changes in the reserve for loan losses for the quarter ended March 31, 2002 and 2001 and the year ended December 31, 2001 are summarized as follows:
Quarter Ended
March 31, December 31,
2002 2001 2001 |
Balance, beginning of period
Charge-offs:
Commercial, financial, and agricultural
Real Estate - construction and mortgage
Loans to individuals
Total charge-offs
Recoveries:
Commercial, financial, and agricultural
Real Estate - construction and mortgage
Loans to individuals
Total recoveries
Net charge-offs/(recoveries)
Additions charge to operations
Balance, end of period
|
$ 3,763
87
33
133
$ 253
$ 44
9
47
$ 100
$ 153
$ 275
$ 3,885
|
$ 3,782
43
25
134
$ 202
$ 11
2
33
$ 46
$ 156
$ 190
$ 3,816
|
$ 3,782
383
96
470
$ 949
$ 106
31
168
$ 305
$ 644
$ 625
$ 3,763
|
Ratio of net charge-offs during the period
to average loans outstanding during the
period
|
.05%
|
.05%
|
.22%
|
The entire balance is available to absorb future loan losses.
At March 31, 2002 and December 31, 2001 loans on which no interest was being accrued totaled approximately $550 and $633, respectively; foreclosed real estate totaled $40 and $64 respectively; and loans 90 days past due and still accruing totaled $157 and $138, respectively.
OTHER INTEREST-BEARING ASSETS
As of March 31, 2002, 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-
NOTE 5 - PREMISES AND EQUIPMENT
Property at March 31, 2002 and December 31, 2001 is summarized as follows:
Land and buildings
Furniture, fixtures and equipment
Construction in progress
Less accumulated depreciation and
amortization
| March 31
2002
$ 14,101
6,208
11
$ 20,320
9,152
$ 11,168 | December 31,
2001
$ 14,097
6,175
5
$ 20,277
8,992
$ 11,285 |
Depreciation and amortization of bank premises and equipment charged to operating expense was $160 for the quarter ended March 31, 2002 and $650 for the year ended December 31, 2001.
NOTE 6 - CERTIFICATES OF DEPOSIT IN EXCESS OF $100,000
At March 31, 2002 and December 31, 2001, certificates of deposit of $100,000 or more included in time deposits totalled approximately $91,413 and $68,608 respectively. Interest expense on these deposits was approximately $623 for the quarter ended March 31, 2002 and $4,627 for the year ended December 31, 2001.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At March 31, 2002 and December 31, 2001, securities sold under repurchase agreements totalled $28,350 and $32,821. U.S. Government securities with a book value of $32,483 ($33,195 market value) and $37,599 ($38,631 market value), respectively, are used as collateral for the agreements. The weighted-average interest rate of these agreements was 1.86 percent and 1.91 percent at March 31, 2002 and December 31, 2001.
NOTE 8 - LINES OF CREDIT
At March 31, 2002, the Bank had unused short-term lines of credit to purchase Federal Funds from unrelated banks totalling $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 and Agency Securities with a market value of $6,187 at March 31, 2002. The amount outstanding under the note totalled $4,205 and $653 at March 31, 2002 and December 31, 2001, respectively.
The Bank also has a line of credit from the Federal Home Loan Bank of Atlanta for $76,306 secured by a lien on the Bank's 1-4 family mortgages. Allowable terms range from overnight to twenty years at varying rates set daily by the FHLB. The amount outstanding under the agreement totalled $1,485 and $1,485 at March 31, 2002 and December 31, 2001, respectively.
NOTE 9 - INCOME TAXES
Income tax expense for the quarter ended March 31, 2002 and March 31, 2001 on pretax income of $2,694 and $1,981 totalled $838 and $615, 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 factors. A summary of income tax components and a reconciliation of income taxes to the federal statutory rate is included in fiscal year-end reports.
The Company accounts for income taxes in accordance with Statement of Financial AccountingStandards ("SFAS") No. 109, "Accounting for Income Taxes".
- -11-
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 March 31, 2002.
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 March 31, 2002, commitments to extend credit totalled $29,548; financial standby letters of credit totalled $890; and performance standby letters of credit totalled $337. In the opinion of management, no material losses or liabilities are expected as a result of these transactions.
Additionally, the bank subsidiary has an outstanding commitment for the construction of a new branch facility located in North Myrtle Beach, S.C. in the amount of $601.
Further, the bank subsidiary has a commitment to purchase $8,998 in Agency securities when they are issued in April, 2002.
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 three percent of employee salary deferred and fifty percent of employee contributions in excess of three percent and up to five percent of salary deferred. The Board of Directors may also make discretionary contributions to the Plan. For the quarter ended March 31, 2002 and years ended December 31, 2001, 2000 and 1999, $124, $426, $404, and $423, 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 also presented in the table below as of March 31, 2002:
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 weighted assets)
Tier I Capital (to
risk weighted assets)
Tier I Capital (to
avg.assets |
$54,560
50,675
50,675 | 16.23%
15.08
9.88 | $26,886
13,443
20,518 | 8.0%
4.0
4.0 | $33,608
20,165
25,648 | 10.0%
6.0
5.0 |
-12-
NOTE 13 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of CNB Corporation (parent company only):
CONDENSED BALANCE SHEET
MARCH 31, 2002
(Unaudited) |
ASSETS
Cash
Investment in subsidiary
Fixed assets
Other assets |
$ 2,784
51,109
1,006
37
$ 54,936
|
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liability
Stockholders' equity
|
$ 0
54,936
$ 54,936
|
CONDENSED STATEMENT OF INCOME
For the three-month period ended March 31, 2002
(Unaudited)
|
EQUITY IN NET INCOME OF SUBSIDIARY
OTHER INCOME
OTHER EXPENSES
Net Income
|
$ 1,899
0
(43)
$ 1,856
|
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A summary of the Significant Accounting Policies and Activities is included in the Form 10-K filed with the Securities and Exchange Commission on March 15, 2002 and is incorporated herein by reference.
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. The accompanying consolidated financial statements include all accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements at March 31, 2002 and for the three-month periods ending March 31, 2002 and 2001 have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q for the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
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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 2.2% from $297,268 at March 31, 2001 to $303,728 at March 31, 2002 but have decreased as a percentage of total assets from 59.7% to 56.3% over the same period as loan demand has lessened in our market. Securities and federal funds sold have increased as a percentage of total assets from 33.1% at March 31, 2001 to 36.7% at March 31, 2002 as lending has slowed. 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 as a percentage of total assets from 15.5% at March 31, 2001 to 16.2% at March 31, 2002. As more customers, both business and per sonal, are attracted to interest-bearing deposit accounts, we expect the percentage of demand deposits to decline over the long-term. Interest-bearing deposits have decreased from 67.3% of total assets at March 31, 2001 to 66.7% at March 31, 2002 while securities sold under agreement to repurchase have decreased from 5.6% to 5.2% over the same period.
The following table sets forth the percentage relationship to total assets of significant component's of the corporation's balance sheet as of March 31, 2002 and 2001:
Assets:
Earning assets:
Loans
Investment securities
Securities Available for Sale
Federal funds sold and securities purchased
under agreement to resell
Total earning assets
Other assets
Total assets
| March 31,
2002 2001 |
56.3%
3.8
25.8
7.1
93.0
7.0
100.0%
|
59.7%
6.7
21.1
5.3
92.8
7.2
100.0%
|
Liabilities and stockholder's equity:
Interest-bearing liabilities:
Interest-bearing deposits
Federal funds purchased and securities sold
under agreement to resell
Other short-term borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders' equity
Total liabilities and stockholders' equity
|
66.7%
5.2
1.1
73.0
16.2
...6
10.2
100.0%
|
67.3%
5.6
.5
73.4
15.5
...9
10.2
100.0%
|
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RESULTS OF OPERATION
CNB Corporation experienced earnings for the three-month period ended March 31, 2002 and 2001 of $1,856 and $1,366, respectively, resulting in a return on average assets of 1.44% and 1.12% and a return on average stockholders' equity of 13.44% and 11.05%.
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 moderate dividend policy, have supplied the necessary capital funds to support the growth in total assets. Total assets have increased $40,856 or 8.2% from $498,170 at March 31, 2001 to $539,026 at March 31, 2002. The following table sets forth the financial highlights for the three-month periods ending March 31, 2002 and March 31, 2001:
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
Three-Month Period Ended March 31,
|
Net interest income after provision
for loan losses
Income before income taxes
Net Income
Per Share
Cash dividends declared
Per Share
Total assets
Total deposits
Loans
Investment securities
Stockholders' equity
Book value per share
Ratios:
Annualized return on average total
assets
Annualized return on average
stockholders' Equity
| Percent
Increase
2002 2001 (Decrease) |
5,027
2,694
1,856
2.59
0
0
539,026
446,653
303,728
159,606
54,936
76.63
1.44%
13.44%
|
4,313
1,981
1,366
1.91
0
0
498,170
412,692
297,268
138,649
50,598
70.80
1.12%
11.05%
|
16.6%
36.0
35.9
35.6
0
0
8.2%
8.2
2.2
15.1
8.6
8.2
28.6%
21.6%
|
(1) For the three-month period ended March 31, 2002 and March 31, 2001, average
total assets amounted to $514,200 and $488,570 with average stockholders'
equity totaling $55,250 and $49,440, respectively.
-15-
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 affected 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 2002 and 2001. 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 mann er that will limit interest rate risk and thus stabilize long-run 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 period ended March 31, 2002 and 2001 by earning satisfactory yields on loans and investments and funding these assets with a favorable deposit mix containing a significant level Of noninterest-bearing demand deposits. However, margins tightened due to strong competition for deposits coupled with a decline in non-interest-bearing balances during 2001 but are returning to more favorable levels in 2002.
Fully-tax-equivalent net interest income showed a 17.9% increase from $4,621 for the three-month period ended March 31, 2001 to $5,449 for the three-month period ended March 31, 2002. During the same period, total fully-tax-equivalent interest income decreased by 13.6% from $9,025 to $7,795 and total interest expense decreased by 46.7% from $4,404 to $2,346. Fully-tax-equivalent net interest income as a percentage of total earning assets has shown an increase of .50% from 4.05% for the three-month period ended March 31, 2001 to 4.55% for the three-month period ended March 31, 2002.
The tables on the following two pages present selected financial data and an analysis of net interest income.
- -16-
CNB Corporation and Subsidiary
Selected Financial Data
|
Assets:
Earning assets:
Loans
Securities:
Taxable
Tax-exempt
Federal funds sold and
securities purchased under
agreement to resell
Total earning assets
Other assets
Total assets
Liabilities and stockholder equity
Interest-bearing liabilities:
Interest-bearing deposits
Federal funds purchased and
securities sold under
agreement to repurchase
Other short-term borrowings
Total interest-bearing
liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income as a percent
of total earning assets
(1) Tax-equivalent adjustment
based on a 34% tax rate
| Three Months Ended 3/31/02 Three Months Ended 3/31/01
Avg. Interest Avg. Ann. Avg. Interest Avg. Ann.
Balance Income/ Yield or Balance Income/ Yield or
Expense Rate Expense(1) Rate |
$301,393
132,460
26,675
18,754
479,282
34,918
$514,200
$339,695
29,314
3,984
$372,993
82,392
3,565
55,250
$514,200
$479,282
|
$ 5,571
1,729
432
63
7,795
2,175
136
35
$ 2,346
$ 5,449
$ 147
|
7.39%
5.22
6.48
1.34
6.51
2.56
1.86
3.51
2.52
4.55
|
$296,949
109,053
19,773
30,208
455,983
32,587
$488,570
$330,960
28,292
3,257
$362,509
72,619
4,002
49,440
$488,570
$455,983
|
$ 6,691
1,579
348
407
9,025
4,010
343
51
$ 4,404
$ 4,621
$ 118
|
9.01%
5.79
7.04
5.39
7.92
4.85
4.85
6.26
4.86
4.05
|
Ratios:
Annualized return on average total assets
Annualized return on average stockholders' equity
Cash dividends declared as a percent of net income
Average stockholders' equity as a percent of:
Average total assets
Average total deposits
Average loans
Average earning assets as a percent of
average total assets
|
1.44
13.44
0
10.74
13.09
18.33
93.21
|
1.12
11.05
0
10.12
12.25
16.65
93.33
|
- -17-
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Three Months Ended March 31, 2002 and 2001
(Dollars in Thousands)
Earning Assets:
Loans, Net of unearned
Income (2)
Investment securities:
Taxable
Tax-exempt
Federal funds sold and
Securities purchased under
agreement to resell
Total Earning Assets
Interest-bearing
Liabilities:
Interest-bearing deposits
Federal funds purchased and
securities sold under
agreement to repurchase
Other short-term borrowings
Total Interest-bearing
Liabilities
Interest-free Funds
Supporting Earning Assets
Total Funds Supporting
Earning Assets
Interest Rate Spread
Impact of Non-interest-
bearing Funds on Net Yield
on Earning Assets
Net Yield on Earning Assets
|
Average
Volume
2002
301,393
132,460
26,675
18,754
479,282
339,695
29,314
3,984
372,993
106,289
479,282
|
Average
Volume
2001
296,949
109,053
19,773
30,208
455,983
330,960
28,292
3,257
362,509
93,474
455,983
|
Yield/Rate
2002 (1)
7.39%
5.22%
6.48%
1.34%
6.51%
2.56%
1.86%
3.51%
2.52%
1.96%
3.99%
.56%
4.55%
|
Yield/Rate
2001 (1)
9.01%
5.79%
7.04%
5.39%
7.92%
4.85%
4.85%
6.26%
4.86%
3.87%
3.06%
.99%
4.05%
|
Interest
Earned/Paid
2002 (1)
5,571
1,729
432
63
7,795
2,175
136
35
2,346
2,346
5,449
|
Interest
Earned/Paid
2001 (1)
6,691
1,579
348
407
9,025
4,010
343
51
4,404
4,404
4,621
|
Variance
(1,120)
150
84
(344)
(1,230)
(1,835)
(207)
(16)
(2,058)
(2,058)
|
Change
Due to
Rate
(1,203)
(155)
(28)
(306)
(1,692)
(1,895)
(211)
(22)
(2,128)
(2,128)
|
Change
Due to
Volume
100
339
121
(154)
406
106
12
11
129
129
| Change Due to Rate X
Volume
(17)
(34)
(9)
116
56
(46)
(8)
(5)
(59)
(59) |
(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.
-18-
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 $275 for the three-month period ended March 31, 2002 and $190 for the three-month period ended March 31, 2001. Net loan charge-offs totalled $153 for the three-month period ended March 31, 2002 and $156 for the same period in 2001.
The reserve for possible loan losses as a percentage of net loans was 1.30% at March 31, 2002 and 1.30% at March 31, 2001. The provision for possible loan losses increased from $190 during the first quarter of 2001 to $275 during the first quarter of 2002 to maintain the reserve at the previous year's level.
Securities Transactions - At March 31, 2002, December 31, 2001, and March 31, 2001 market value appreciation/(depreciation) in the investment portfolio totalled $1,211, $2,999, and $1,890, respectively. As indicated, market values have remained strong due to lower market interest rates. No security gains/(losses) were taken during the first quarter of 2001, but a gain of $183 was taken during the first quarter of 2002 to supplement liquidity and to take advantage of a steeply-sloping yield curve.
Other Income - Other income, net of any gains/losses on security transactions, increased by 3.2% from $1,133 for the three-month period ended March 31, 2001 to $1,169 for the three-month period ended March 31, 2002 primarily due to an increase in deposit account volumes and higher merchant discount income, offset somewhat by a slow-down in mortgage refinancing activity. Effective July 1, 2001, overall service charge rates were increased which will correspondingly increase future non-interest income levels.
Other Expenses - Other expenses increased by 6.3% from $3,465 for the three-month period ended March 31, 2001 to $3,685 for the three-month period ended March 31, 2002. The major components of other expenses are salaries and employee benefits which increased 8.4% from $2,180 to $2,363; occupancy expense which increased .8% from $483 to $487; and other operating expenses which increased by 4.1% from $802 to $835. The increase in the three-month period ended March 31, 2002 salaries and employee benefits was due to normal pay increments and the increased costs of providing employee benefits, particularly health insurance coverage. Looking ahead, occupancy expense will grow in 2002 due to the addition of the North Myrtle Beach Office, and in 2003 due to the construction of a new Main Office Retail Center.
Income Taxes - Provisions for income taxes increased 36.3% from $615 for the three-month period ended March 31, 2001 to $838 for the three-month period ended March 31, 2002. Income before income taxes less interest of tax-exempt investment securities increased by 37.6% from $1,751 for the three-month period ended March 31, 2001 to $2,409 for the same period in 2002. State tax liability increased as income before income taxes increased 36.0% from $1,981 to $2,694 during the same period.
-19-
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 to borrow funds from the Federal Reserve System and the Federal Home Loan Bank of Atlanta. Management feels that short-term and long-term liquidity sources are more than adequate to meet funding needs.
CAPITAL RESOURCES
Total stockholders' equity was $54,936, $53,996, $48,606 and $43,712 at March 31, 2002, December 31, 2001, December 31, 2000, and December 31, 1999, representing 10.19%, 10.68%, 10.32%, and 9.59% of total assets, respectively. At March 31, 2002, 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.
EFFECTS OF REGULATORY ACTION
The Federal Deposit Insurance Corporation (FDIC) reduced FDIC insurance premium rates during 1995 which has had a positive effect on subsequent earnings and should favorably impact future year's income. Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999 allows bank holding companies to elect to be treated as financial holding companies which may engage in a broad range of securities, insurance, and other financial activities. At this time, neither the Company nor the Bank plan to enter these new lines of business. The management of the Company and the Bank is not aware of any other 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
Statement of Financial Accounting Standards No. 140,"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of SFAS No. 125," was issued in September 2000. It revised the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures but will carry over most of SFAs No. 125's provisions without reconsideration. SFAS 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures related to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of the provisions of SFAS No. 140 in 2001 did not have a material effect on the Company.
- -20-
ACCOUNTING ISSUES (continued)
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,"Business Combinations", and SFAS No. 142,"Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Company was required to adopt the provisions of SFAS No. 141 immediately and must adopt SFAS No. 142 effective January 1, 2002. The adoption of the provisions of SFAS No. 141 in 2001 did not have a material effect on t he Company. The adoption of SFAS No. 142 is not expected to have a material effect on the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supercedes prior pronouncements associated with impairment or disposal of long-lived assets. The SFAS establishes methodologies for assessing impairment of long-lived assets, including assets to be disposed of by sale or by other means. This statement is effective for all fiscal years beginning after December 15, 2001. This SFAS is not expected to have a material impact on the Company's financial position.
On July 2, 2001, The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 102,"Selected Loan Loss Allowance Methodology and Documentation Issues". SAB 102 expresses the SEC's views on the development, documentation and application of a systematic methodology for determining the allowance for loan and lease losses in accordance with Generally Accepted Accounting Principles. The Company believes that it is currently in compliance with the requirements of SAB 102.
Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
RISKS AND UNCERTAINTIES
In the normal course of its business the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrower's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators' judgments based on information available to them at the time of their examination.
-21-
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks which the Company manages in the normal course of business, such as credit quality and liquidity risk, management considers interest rate risk to be a significant market risk that could potentially have a material effect on the Company's financial condition and results of operations (See Net Income - Net Interest Income). Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of the Company's business activities.
- -22-
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
All other exhibits, the filing of which are required with this Form, are not applicable.
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: May 14, 2002
-23-
