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, 1997
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 March 31, 1997 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 March 31, 1997 was 478,773.
CNB Corporation
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997, 1
December 31, 1996 and March 31, 1996
Consolidated Statement of Income for the Three Months 2
Ended March 31, 1997 and 1996
Consolidated Statement of Changes in Stockholders' 3
Equity for the Three Months Ended March 31, 1997
and 1996
Consolidated Statement of Cash Flows for the Three Months 4
Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 5-12
Item 2. Management's Discussion and Analysis of Financial 13-19
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
CNB Corporation and Subsidiary
Consolidated Balance Sheets
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
March 31, December 31, March 31,
1997 1996 1996
ASSETS:
Cash and due from banks $ 15,118 $ 14,350 $ 13,714
Interest bearing deposits with banks 0 0 0
Investment Securities 72,784 70,149 75,982
(Fair values of $72,411 at
March 31, 1997, $70,306 at
December 31, 1996, and $75,981
at March 31, 1996)
Securities Available for Sale 60,557 62,138 64,833
(Amortized cost of $60,885 at
March 31, 1997, $62,093 at
December 31, 1996, and $64,683
at March 31, 1996)
Federal Funds sold and securities
purchased under agreement
to resell 12,150 0 6,600
Loans:
Gross Loans 197,704 185,933 164,168
Less unearned income (1,022) (1,058) (1,089)
Loans, net of unearned income 196,682 184,875 163,079
Less reserve for possible
loan losses (2,534) (2,370) (2,267)
Net loans 194,148 182,505 160,812
Bank premises and equipment 6,702 6,866 6,965
Other assets 6,211 5,810 6,013
Total assets 367,670 341,818 334,919
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing 55,240 49,885 46,637
Interest-bearing 239,787 218,528 208,918
Total deposits 295,027 268,413 255,555
Federal funds purchased and
securities sold under agreement
to repurchase 32,312 33,018 42,373
Other short-term borrowings 2,573 2,319 1,981
Obligations under mortgages and
capital leases 4 6 9
Other liabilities 2,271 3,541 2,215
Minority interest in subsidiary 25 25 23
Total liabilities 332,212 307,322 302,156
Stockholders' equity:
Common stock, par value $10 per
share: Authorized 500,000;
issued 479,093 shares 4,791 4,791 4,791
Surplus 15,699 15,697 15,685
Undivided Profits 15,194 14,082 12,359
Net Unrealized Holding (196) 27 90
Gains (Losses) on
Available-For-Sale Securities
Less: Treasury stock (30) (101) (162)
Total stockholders' equity 35,458 34,496 32,763
Total liabilities
and stockholders' equity 367,670 341,818 334,919
1
CNB Corporation and Subsidiary
Consolidated Statement of Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
Interest Income:
Interest and fees on loans $ 4,509 $ 3,708
Interest on investment securities:
Taxable investment securities 1,757 1,872
Tax-exempt investment securities 180 190
Other securities 0 0
Interest on federal funds sold and securities
purchased under agreement to resell 129 124
Total interest income 6,575 5,894
Interest Expense:
Interest on deposits 2,366 2,108
Interest on federal funds purchased and securities
sold under agreement to repurchase 415 550
Interest on other short-term borrowings 17 17
Interest on obligation under mortgages and
capital leases 0 0
Total interest expense 2,798 2,675
Net interest income 3,777 3,219
Provision for possible loan losses 240 50
Net interest income after provision for possible
loan losses 3,537 3,169
Other income:
Service charges on deposit accounts 534 484
Gains/(Losses) on securities 0 38
Other operating income 186 168
Total other income 720 690
Other expenses:
Minority interest in income of subsidiary 1 1
Salaries and employee benefits 1,513 1,431
Occupancy expense 420 462
Other operating expenses 607 588
Total operating expenses 2,541 2,482
Income before income taxes 1,716 1,377
Income tax provision 603 450
Net Income 1,113 927
Per share data:
Net income per weighted average shares outstanding $ 2.33 $ 1.94
Cash dividend paid per share $ 0 $ 0
Book value per actual number of shares outstanding $ 74.06 $ 68.65
Weighted average number of shares outstanding 478,558 477,241
Actual number of shares outstanding 478,773 477,233
2
CNB Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(All Dollar Amounts in Thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
Common Stock:
($10 par value; 500,000 shares authorized)
Balance, January 1 4,791 4,791
Issuance of Common Stock None None
Balance at end of period 4,791 4,791
Surplus:
Balance, January 1 15,697 15,676
Issuance of Common Stock None None
Gain on sale of treasury stock 2 9
Balance at end of period 15,699 15,685
Undivided profits:
Balance, January 1 14,082 11,431
Net Income 1,113 927
Cash dividends declared None None
Balance at end of period 15,194 12,359
Net unrealized holding gains/(losses) on
available-for-sale securities:
Balance, January 1 27 430
Change in net unrealized gains/(Losses) (223) (340)
Balance at end of period (196) 90
Treasury stock:
Balance, January 1 (101) (133)
Purchase of treasury stock (7) (7)
Reissue of treasury stock 79 69
Balance at end of period (30) (162)
Total stockholders' equity 35,458 32,763
Note: Columns may not add due to rounding.
3
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the three-month period ended March 31,
1997 1996
OPERATING ACTIVITIES
Net income $ 1,113 $ 927
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 167 243
Provision for loan losses 240 50
Provision for deferred income taxes (60) (34)
Loss (gain) on sale of investment
securities 0 0
(Increase) decrease in accrued interest
receivable (407) (339)
(Increase) decrease in other assets 6 135
(Decrease) increase in other liabilities (4) 133
Increase in minority interest in
subsidiary 0 1
Net cash provided by operating
activities 1,055 1,154
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale 0 2,000
Proceeds from maturities of investment
securities held to maturity 5,570 4,819
Proceeds from maturities of investment
securities available for sale 3,500 1,000
Purchase of investment securities held to
maturity (6,124) (6,600)
Purchase of investment securities
available for sale (4,000) (3,950)
Decrease (increase) in interest-bearing
deposits in banks 0 0
(Increase) decrease in federal funds sold (12,150) 700
(Increase) decrease in loans (11,807) (10,675)
Premises and equipment expenditures (3) 42
Net cash provided by (used for)
investing activities (25,014) (12,664)
FINANCING ACTIVITIES
Dividends paid (1,433) (1,432)
Increase (Decrease) in deposits 26,614 4,399
(Decrease) increase in securities sold
under repurchase agreement (706) 5,438
(Decrease) increase in other
short-term borrowings 254 1,215
Increase (decrease)in obligation under
mortgages and capital leases (2) (1)
Net cash provided by (used for)
financing activities 24,727 9,619
Net increase (decrease) in cash
and due from banks 768 (1,891)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 14,350 15,605
CASH AND DUE FROM BANKS, MARCH 31, 1997 AND 1996 $15,118 $13,714
CASH PAID (RECEIVED) FOR:
Interest $ 2,601 $ 2,564
Income taxes $ 551 $ 487
4
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, 478,558 for the
three-month period ended March 31, 1997 and 477,241 for the three-month
period ended March 31, 1996.
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, 1997 and
for the years ended December 31, 1996 and 1995 were approximately $5,228,
$5,112, and $4,306, respectively.
5
NOTE 3 - INVESTMENT SECURITIES
Investment securities with a par value of approximately $70,930 at March 31,
1997 and $55,665 at December 31, 1996 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, 1997 and at December 31, 1996.
March 31, 1997
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1)
AVAILABLE FOR SALE
United States Treasury
Within one year $16,000 $ 31 $ 23 $16,008 5.94%
One to five years 16,265 93 75 16,283 6.47
32,265 124 98 32,291 6.21
Federal agencies
Within one year 0 0 0 0 -
One to five years 27,419 11 355 27,075 6.00
After ten years 759 1 19 741 6.07
28,178 12 374 27,816 6.00
State, county and
municipal
One to five years 326 8 0 334 7.85
326 8 0 334 7.85
Other Securities(Equity) 116 0 0 116 -
Total available for sale $60,885 $ 144 $ 472 $60,557 6.11%
HELD TO MATURITY
United States Treasury
Within one year 18,024 12 64 17,972 5.44%
One to five years 21,684 68 191 21,561 5.82
39,708 80 255 39,533 5.65
Federal agencies
Within one year 0 0 0 0 -
One to five years 17,285 0 201 17,084 6.27
Six to ten years 2,002 0 59 1,943 6.40
19,287 0 260 19,027 6.28
State, county and
municipal
Within one year 1,749 39 3 1,785 8.23%
One to five years 6,255 185 32 6,408 8.67
Six to ten years 5,665 2 130 5,537 7.04
After ten years 120 1 0 121 8.06
13,789 227 165 13,851 7.94
Total held to maturity $72,784 $ 307 $ 680 $72,411 6.25%
(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended March 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 $(196) as of March 31, 1997.
6
NOTE 3 - INVESTMENT SECURITIES (Continued)
1996
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1)
AVAILABLE FOR SALE
United States Treasury
Within one year $15,533 $ 52 $ 22 $15,563 5.95%
One to five years 16,262 169 27 16,404 6.46
31,795 221 49 31,967 6.21
Federal agencies
Within one year 0 0 0 0 -
One to five years 29,072 48 169 28,951 6.04
After ten years 784 0 18 766 6.08
29,856 48 187 29,717 6.04
State, county and
municipal
One to five years 326 12 0 338 7.85
326 12 0 338 7.85
Other Securities (Equity) 116 - - 116 -
Total available for sale $62,093 $ 281 $ 236 $62,138 6.14%
HELD TO MATURITY
United States Treasury
Within one year 17,066 20 30 17,056 5.36%
One to five years 23,703 154 176 23,681 5.67
40,769 174 206 40,737 5.54
Federal agencies
Within one year 0 0 0 0 -
One to five years 13,320 97 110 13,307 6.27
Six to ten years 2,002 0 35 1,967 6.40
15,322 97 145 15,274 6.28
State, county and
municipal
Within one year 1,112 2 2 1,112 8.87
One to five years 6,950 302 15 7,237 8.72
Six to ten years 5,626 20 75 5,571 6.98
After ten years 370 5 0 375 7.89
14,058 329 92 14,295 8.01
Total held to maturity $70,149 $ 600 $ 443 $70,306 6.20%
(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended December 31, 1996, 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 $27 as of December 31, 1996.
7
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans at March 31, 1997 and December 31,
1996 by major classification:
March 31, December 31,
1997 1996
Real estate loans - mortgage $ 120,070 $ 111,474
- construction 15,978 15,148
Commercial and industrial loans 30,971 28,105
Loans to individuals for household,
family and other consumer expenditures 28,452 29,642
Agriculture 2,003 1,328
All other loans, including overdrafts 230 236
Gross loans 197,704 185,933
Less unearned income (1,022) (1,058)
Less reserve for loan losses (2,534) (2,370)
Net loans 194,148 182,505
8
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, continued
Changes in the reserve for loan losses for the quarter ended March 31,
1997 and 1996 and the year ended December 31, 1996 are summarized as follows:
Quarter Ended
March 31, December 31,
1997 1996 1996
Balance, beginning of period $ 2,370 $ 2,242 $ 2,242
Charge-offs:
Commercial, financial, and agricultural 28 30 108
Real Estate - construction and mortgage 0 0 22
Loans to individuals 81 60 299
Total charge-offs $ 109 $ 90 $ 429
Recoveries:
Commercial, financial, and agricultural $ 5 $ 24 $ 47
Real Estate - construction and mortgage 0 3 15
Loans to individuals 28 38 135
Total recoveries $ 33 $ 65 $ 197
Net charge-offs/(recoveries) $ 76 $ 25 $ 232
Additions charge to operations $ 240 $ 50 $ 360
Balance, end of period $ 2,534 $ 2,267 $ 2,370
Ratio of net charge-offs during the period
to average loans outstanding during the
period .04% .02% .14%
The entire balance is available to absorb future loan losses.
At March 31, 1997 and December 31, 1996 loans on which no interest was being
accrued totalled approximately $147 and $377, respectively; foreclosed real
estate totalled $0 and $0, respectively; and loans 90 days past due and still
accruing totalled $52 and $77, respectively.
OTHER INTEREST-BEARING ASSETS
The Bank maintains 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 (U.S.) was confirmed by the State of Michigan in the
Circuit Court for the County of Ingham. The plan provides 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 will have the option to have a policy reinsured by
Pacific Mutual which is 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. Management anticipates the
Bank's COLI policies to be reinsured by Pacific Mutual prior to year-end
1997.
The Bank's independent external auditors have revisited the facts and
circumstances regarding the investment in the COLI program and have 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 as
of the date of this report.
As of March 31, 1997, 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.
9
NOTE 5 - PREMISES AND EQUIPMENT
Property at March 31, 1997 and December 31, 1996 is summarized as
follows:
March 31, December 31,
1997 1996
Land and buildings $ 8,295 $ 8,358
Furniture, fixtures and equipment 5,244 5,404
Construction in progress 0 45
$ 13,539 $ 13,807
Less accumulated depreciation and
amortization 6,837 6,941
$ 6,702 $ 6,866
Depreciation and amortization of bank premises and equipment charged to
operating expense was $167 for the quarter ended March 31, 1997 and $757 for
the year ended December 31, 1996.
NOTE 6 - CERTIFICATES OF DEPOSIT IN EXCESS OF $100,000
At March 31, 1997 and December 31, 1996, certificates of deposit of
$100,000 or more included in time deposits totaled approximately $53,607 and
$34,318 respectively. Interest expense on these deposits was approximately
$630 for the quarter ended March 31, 1997 and $1,639 for the year ended
December 31, 1996.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At March 31, 1997 and December 31, 1996, securities sold under
repurchase agreements totaled approximately $32,312 and $29,018. U.S.
Government securities with a book value of $39,910 ($39,809 market value) and
$42,181 ($42,174 market value), respectively, are used as collateral for the
agreements. The weighted-average interest rate of these agreements was 4.70
percent and 4.71 percent at March 31, 1997 and December 31, 1996.
NOTE 8 - LINES OF CREDIT
At March 31, 1997, the Bank had unused short-term lines of credit to
purchase Federal Funds from unrelated banks totaling $17,000. 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
$5,000 under the arrangement at a variable interest rate. The note is
secured by U.S. Treasury Notes with a market value of $5,875 at March 31,
1997. The amount outstanding under the note totaled $2,573 and $2,319 at
March 31, 1997 and December 31, 1996, respectively.
NOTE 9 - INCOME TAXES
Income tax expense for the quarter ended March 31, 1997 and March 31,
1996 on pretax income of $1,716 and $1,377 totalled $603 and $450
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
is 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.
10
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, 1997.
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, 1997, commitments to extend credit totalled $10,947; financial standby
letters of credit totalled $562; and performance standby letters of credit
totalled $505. 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 quarter ended March
31, 1997 and years ended December 31, 1996, 1995 and 1994, $87, $336, $266,
and $295, 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, 1997:
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 $36,233 17.87% $16,218 8.0% $20,273 10.0%
weighted assets)
Tier I Capital (to risk 33,699 16.62 8,109 4.0 12,164 6.0
weighted assets)
Tier I Capital (to avg. 33,699 9.40 14,344 4.0 17,930 5.0
assets)
11
NOTE 13 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of CNB Corporation (parent
company only):
CONDENSED BALANCE SHEET
MARCH 31, 1997
(Unaudited)
ASSETS
Cash $ 1,690
Investment in subsidiary 33,477
Fixed assets 254
Other assets 37
$ 35,458
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liability $ 0
Stockholders' equity 35,458
$ 35,458
CONDENSED STATEMENT OF INCOME
For the three-month period ended March 31, 1997
(Unaudited)
EQUITY IN NET INCOME OF SUBSIDIARY $ 1,130
OTHER INCOME 0
OTHER EXPENSES (17)
Net Income $ 1,113
12
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 20.6% from $163,079 at March 31, 1996 to $196,682 at March 31, 1997
and have increased as a percentage of total assets from 48.7% to 53.5% over
the same period as loan demand has remained strong in our market. Securities
and federal funds sold have decreased as a percentage of total assets from
44.0% at March 31, 1996 to 39.6% at March 31, 1997 as we have utilized
funds from the investments area to meet the credit needs of the community.
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 13.9% at March 31,
1996 to 15.0% at March 31, 1997. However, as more customers, both business
and personal, are attracted to interest-bearing deposit accounts, we expect
the decline in the percentage of demand deposits to continue over the
long-term. Interest-bearing deposits have grown from 62.3% of total assets
at March 31, 1996 to 65.2% at March 31, 1997 while securities sold under
agreement to repurchase have decreased from 12.7% to 8.8% 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,
1997 and 1996:
March 31,
Assets: 1997 1996
Earning assets:
Loans, net of unearned income 53.5% 48.7%
Investment securities 19.8 22.7
Securities Available for Sale 16.5 19.3
Federal funds sold and securities purchased
under agreement to resell 3.3 2.0
Other earning assets - -
Total earning assets 93.1 92.7
Other assets 6.9 7.3
Total assets 100.0% 100.0%
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits 65.2% 62.3%
Federal funds purchased and securities sold
under agreement to repurchase 8.8 12.7
Other short-term borrowings .7 .6
Obligations under mortgages and capital leases - -
Total interest-bearing liabilities 74.7 75.6
Noninterest-bearing deposits 15.0 13.9
Other liabilities .7 .7
Stockholders' equity 9.6 9.8
Total liabilities and stockholders' equity 100.0% 100.0%
13
RESULTS OF OPERATION
CNB Corporation experienced earnings for the three-month period ended
March 31, 1997 and 1996 of $1,113 and $927, respectively, resulting in a
return on average assets of 1.24% and 1.12% and a return on average
stockholders' equity of 13.16% and 11.39%.
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 $32,751 or 9.8% from
$334,919 at March 31, 1996 to $367,670 at March 31, 1997. The following
table sets forth the financial highlights for the three-month periods ending
March 31, 1997 and March 31, 1996:
CNB Corporation
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
Three-Month Period Ended March 31,
Percent
Increase
1997 1996 (Decrease)
Net interest income after provision for
loan losses 3,537 3,169 11.6%
Income before income taxes 1,716 1,377 24.6
Net Income 1,113 927 20.1
Per Share (1) 2.33 1.94 20.1
Cash dividends declared 0 0 0
Per Share (1) 0 0 0
Total assets 367,670 334,919 9.8%
Total deposits 295,027 255,555 15.4
Loans, net of unearned income 196,682 163,079 20.6
Investment securities 133,341 140,815 (5.3)
Stockholders' equity 35,458 32,763 8.2
Book value per share 74.06 68.65 7.9
Ratios (1):
Annualized return on average total assets 1.24% 1.12% 10.7%
Annualized return on average stockholders'
equity 13.16% 11.39% 15.5%
(1) For the three-month period ended March 31, 1997 and March 31, 1996,
average total assets amounted to $358,598 and $332,090 with average
stockholders' equity totaling $33,817 and $32,555, respectively.
14
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 1997 and 1996. 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
period ended March 31, 1997 and 1996 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.
Fully-tax-equivalent net interest income showed a 16.7% increase from $3,317
for the three-month period ended March 31, 1996 to $3,870 for the
three-month period ended March 31, 1997. During the same period, total
fully-tax-equivalent interest income increased by 11.3% from $5,992 to
$6,668 and total interest expense increased by 4.6% from $2,675 to $2,798.
Fully-tax-equivalent net interest income as a percentage of total
earning assets has shown an increase of .33% from 4.29% for the three-month
period ended March 31, 1996 to 4.62% for the three-month period ended March
31, 1997.
The tables on the following two pages present selected financial data and
an analysis of net interest income.
15
CNB Corporation and Subsidiary
Selected Financial Data
Three Months Ended 3/31/97 Three Months Ended 3/31/96
Avg. Interest Avg. Ann. Avg. Interest Avg.Ann.
Balance Income/ Yield or Balance Income/ Yield or
Expense(1) Rate Expense(1) Rate
Assets:
Earning assets:
Loans, net of unearned income $190,868 $ 4,509 9.45% $158,008 $ 3,708 9.39%
Securities:
Taxable 119,212 1,757 5.90 128,170 1,872 5.84
Tax-exempt 13,952 273 7.83 14,293 288 8.06
Federal funds sold and
securities purchased under
agreement to resell 10,800 129 4.78 9,052 124 5.48
Other earning assets 0 0 - 0 0 -
Total earning assets 334,832 6,668 7.97 309,523 5,992 7.74
Other assets 23,766 22,567
Total assets $358,598 $332,090
Liabilities and stockholder equity
Interest-bearing liabilities:
Interest-bearing deposits $233,672 2,366 4.05 $206,390 $ 2,108 4.09
Federal funds purchased and
securities sold under
agreement to repurchase 35,945 415 4.62 44,812 550 4.91
Other short-term borrowings 1,237 17 5.50 996 17 6.83
Obligations under mortgages
and capitalized leases 4 0 8.00 9 0 8.00
Total interest-bearing
liabilities $270,858 $ 2,798 4.13 $252,207 $ 2,675 4.24
Noninterest-bearing deposits 50,346 46,285
Other liabilities 3,577 1,043
Stockholders' equity 33,817 32,555
Total liabilities and
stockholders' equity $358,598 $332,090
Net interest income as a percent
of total earning assets $334,832 $ 3,870 4.62 $309,523 $ 3,317 4.29
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 93 $ 98
Ratios:
Annualized return on average total assets 1.24 1.12
Annualized return on average stockholders' equity 13.16 11.39
Cash dividends declared as a percent of net income 0 0
Average stockholders' equity as a percent of:
Average total assets 9.43 9.80
Average total deposits 11.91 12.88
Average loans, net of unearned income 17.72 20.60
Average earning assets as a percent of
average total assets 93.37 93.20
16
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Three Months Ended March 31, 1997 and 1996
(Dollars in Thousands)
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
1997 1996 1997 (1) 1996 (1) 1997 (1) 1996 (1) Variance Rate Volume Volume
Earning Assets:
Loans, Net of unearned
income (2) 190,868 158,008 9.45% 9.39% 4,509 3,708 801 24 771 6
Investment securities:
Taxable 119,212 128,170 5.90% 5.84% 1,757 1,872 (115) 19 (131) (3)
Tax-exempt 13,952 14,293 7.83% 8.06% 273 288 (15) (8) (7) -
Federal funds sold and
securities purchased under
agreement to resell 10,800 9,052 4.78% 5.48% 129 124 5 (16) 24 (3)
Other earning assets 0 0 - - 0 0 0 - - -
Total Earning Assets 334,832 309,523 7.97% 7.74% 6,668 5,992 676 19 657 0
Interest-bearing Liabilities:
Interest-bearing deposits 233,672 206,390 4.05% 4.09% 2,366 2,108 258 (20) 281 (3)
Federal funds purchased and
securities sold under
agreement to repurchase 35,945 44,812 4.62% 4.91% 415 550 (135) (32) (109) 6
Other short-term borrowings 1,237 996 5.50% 6.83% 17 17 0 (3) 4 (1)
Mortgage indebtedness and
obligations under capital-
ized leases 4 9 8.00% 8.00% 0 0 0 - - -
Total Interest-bearing
Liabilities 270,858 252,207 4.13% 4.24% 2,798 2,675 123 (55) 176 2
Interest-free Funds
Supporting Earning Assets 63,974 57,316
Total Funds Supporting
Earning Assets 334,832 309,523 3.35% 3.45% 2,798 2,675 123 (55) 176 2
Interest Rate Spread 3.84% 3.50%
Impact of Non-interest-
bearing Funds on Net Yield
on Earning Assets .78% .79%
Net Yield on Earning Assets 4.62% 4.29% 3,870 3,317
(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.
17
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 $240 for the three-month period
ended March 31, 1997 and $50 for the three-month period ended March 31,
1996. Net loan charge-offs totaled $76 for the three-month period ended
March 31, 1997 and $25 for the same period in 1996.
The reserve for possible loan losses as a percentage of net loans was 1.31%
at March 31, 1997 and 1.41% at March 31, 1996. Although net loan losses
remain below budget, the provision for possible loan losses increased from
$50 during the first quarter of 1996 to $240 during the first quarter of 1997
in recognition of the significant loan growth of $33.6 million from $163.1
million at March 31, 1996 to $196.7 million at March 31, 1997.
Securities Transactions - The bank recognized a gain on security transactions
for the three-month period ended March 31, 1996 of $38 but had no security
sales during the first quarter of 1997. Management sold approximately $2
million in treasury bonds in 1996 to fund loan growth and to adjust the
Bank's interest rate sensitivity position. At March 31, 1997, December 31,
1996, and March 31, 1996 market value appreciation/(depreciation) in the
investment portfolio totaled $(701), $202, and $149, respectively. As
indicated, market value declined somewhat in 1997 due to rising market
interest rates.
Other Income - Other income, net of any gains/losses on security
transactions, increased by 10.4% from $652 for the three-month period ended
March 31, 1996 to $720 for the three-month period ended March 31, 1997
primarily due to an increase in deposit account volumes and higher merchant
discount income.
Other Expenses - Other expenses increased by 2.4% from $2,482 for the
three-month period ended March 31, 1996 to $2,541 for the three-month period
ended March 31, 1997. The major components of other expenses are salaries
and employee benefits which increased 5.7% from $1,431 to $1,513; occupancy
expense which decreased 9.1% from $462 to $420; and other operating
expenses which increased by 3.2% from $588 to $607. Occupancy expense has
declined as depreciation expense has decresed 31.3% from $243 during the
first quarter of 1996 to $167 for the same period in 1997.
Income Taxes - Provisions for income taxes increased 34.0% from $450 for the
three-month period ended March 31, 1996 to $603 for the three-month period
ended March 31, 1997. Income before income taxes less interest of
tax-exempt investment securities increased by 29.4% from $1,187 for the
three-month period ended March 31, 1996 to $1,536 for the same period in
1997. State tax liability increased as income before income taxes increased
24.6% from $1,377 to $1,716 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.
18
CAPITAL RESOURCES
Total stockholders' equity was $35,458, $34,496, $32,195, and $28,857 at
March 31, 1997, December 31, 1996, December 31, 1995, and December 31, 1994,
representing 9.64%, 10.09%, 9.92%, and 9.71% of total assets, respectively.
At March 31, 1997, the Bank exceeds quantitative measures established by
regulation to ensure capital adequacy (see NOTE 12 - REGULATION 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 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.
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
statement requires that long-lived assets and certain identified intangibles
to be held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The statement is effective for the Company for the
fiscal year ending December 31, 1996 and does not have a significant impact
on the Company's financial statements.
In May 1995, the FASB issued SFAS 122, "Accounting For Mortgage
Servicing Rights," which amends SFAS No. 65, "Accounting For Mortgage Banking
Activities." This statement allows the capitalization of servicing-related
costs associated with mortgage loans that are originated for sale, and to
create servicing assets for such loans. Prior to this statement, originated
mortgage servicing rights were generally accorded off-balance sheet
treatment. The statement is effective for the Company for the fiscal year
ending December 31, 1996. The adoption will have no material effect on the
Company's financial condition or results of operations.
The FASB issued SFAS No. 123, "Accounting For Stock-based Compensation,"
in October 1995. This statement supersedes APB Opinion No. 25, "Accounting
For Stock Issued to Employees" and established financial accounting and
reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. The
statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. This
pronouncement does not apply to the Company and therefore will have no effect
upon adoption.
In June 1996, the FASB issued SFAS 125 "Accounting For Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." FASB's
objective is to develop consistent accounting standards for such
transactions, including determining when financial assets should be
considered sold and removed from the statement of financial position and when
related revenues and expenses should be recognized. This approach focuses on
analyzing the components of financial asset transfers and requires each party
to a transfer to recognize the financial assets it controls and liabilities
it has incurred and remove such assets from the statement of financial
position when control over them hs been relinquished. The statement is not
expected to have a significant impact on the accounting practices of the
Company and is generally effective for transactions entered into after
December 31, 1996.
19
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 22 and 23).
All other exhibits, the filing of which are required with this Form, are not
applicable.
20
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 13, 1997
21