UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997.
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the Transition Period From ___________ to ___________.
Commission file number 2-96350
CNB CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-0792402
(State of incorporation) (I.R.S. Employer Identification No.)
1400 Third Avenue, 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
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class of which registered
Common Stock, par value $10.00 per share...............................None
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of February 28, 1998, 597,822 shares of Common Stock of CNB
Corporation were outstanding and the aggregate market value of such Common
Stock held by nonaffiliates (based upon the price at which stock was sold
during the 60 days prior to the date of filing) was approximately
$53,803,980.
No Documents have been incorporated by reference.
TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business and Supplementary Data 1-21
ITEM 2. Properties 22
ITEM 3. Legal Proceedings 22
ITEM 4. Submission of Matters to a Vote of Security Holders 23
PART II
ITEM 5. Market for the Registrant's Common Stock and Related 23
Security Holder Matters
ITEM 6. Selected Financial Data 24
ITEM 7. Management's Discussion and Analysis of Financial 25-31
Condition and Results of Operations
ITEM 8. Financial Statements 32-53
ITEM 9. Disagreements on Accounting and Financial Disclosure 53
PART III
ITEM 10. Directors and Executive Officers of the Registrant 54-58
ITEM 11. Executive Compensation 59-61
ITEM 12. Security Ownership of Certain Beneficial Owners 62
and Management
ITEM 13. Certain Relationships and Related Transactions 62
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, Notes to 63
Financial Statements, and Reports on Form 8-K
PART I
ITEM 1. Description of Business
DESCRIPTION OF CNB CORPORATION
CNB Corporation (the "Company") is a South Carolina business corporation
organized for the purpose of becoming a bank holding company for The Conway
National Bank (the "Bank") under the Bank Holding Company Act. The Company
was organized with $500 of capital on March 8, 1985; received approval from
the Board of Governors of the Federal Reserve System on May 15, 1985, to
become a bank holding company; and on June 10, 1985, acquired, in exchange
for its own shares of common stock, substantially all of the common stock of
the Bank. The activities of the Company are subject to the supervision of
the Federal Reserve, and the Company may engage directly or through
subsidiary corporations in those activities closely related to banking which
are specifically permitted under the Bank Holding Company Act. See
"Supervision and Regulation." Although the Company, after obtaining the
requisite approval of the Federal Reserve and any other appropriate
regulatory agency, may seek to enter businesses closely related to banking or
to acquire existing businesses already engaged in such activities, the
Company has not conducted, and has no present intent to conduct, negotiations
for the acquisition or formation of any entities to engage in other
permissible activities other than the acquisition of the Bank. There can be
no assurance that the Company will form or acquire any other entity.
The Company and the Bank compete with those banks and other financial
institutions that compete with the Bank. See "Competition." In addition,
if the Company attempts to form or acquire other entities and engage in
activities closely related to banking, the Company will be competing with
other bank holding companies and companies currently engaged in lines of
business or permissible activities in which the Company might engage, many
of which have far greater assets and financial resources than the Company and
a greater capacity to raise additional debt and equity capital than the
Company.
DESCRIPTION OF THE SUBSIDIARY
The Bank is an independent community bank engaged in the general commercial
banking business in Horry County, South Carolina. The Bank was organized on
June 5, 1903 as the Bank of Horry located on Main Street in Conway, South
Carolina. The Bank became a national bank operating as The Conway National
Bank in 1914. On June 10, 1985, the Bank was reorganized into a bank
holding company structure when substantially all of the common stock of the
Bank was acquired by CNB Corporation in exchange for its own shares of common
stock. In 1960, the Bank opened its first additional office at 1400 Third
Avenue in Conway. Since that time, the following offices have been opened
in Horry County: Coastal Centre in Conway (1969); Surfside in Surfside Beach
(1971); Northside, north of Myrtle Beach (1977); Red Hill in Conway (1981);
Socastee, in the southern portion of Myrtle Beach (1986); Aynor in the Town
of Aynor (1991), and Myrtle Beach in the City of Myrtle Beach (1995). The
Surfside office was enlarged in 1977 and 1984, and the Coastal Centre office
was expanded in 1980. The Third Avenue office, which houses the Bank's
administrative offices and data processing facilities was expanded in 1982
from 11,150 square feet to 33,616 square feet. The Bank employs
approximately 182 full-time-equivalent employees at its principal office and
eight branch offices.
1
The Bank performs the full range of normal commercial banking functions.
Some of the major services provided include checking accounts, NOW accounts,
money market deposit accounts, IRA accounts, savings and time deposits of
various types and loans to individuals for personal use, home mortgages,
home improvement, automobiles, real estate, agricultural purposes and
business needs. Commercial lending operations include various types of
credit for business, industry, and agriculture. In addition, the Bank
offers safe deposit boxes, wire transfer services, bank money orders, 24-hour
teller machines on the HONOR Network, direct deposits and a MasterCard/Visa
program. Through a correspondent relationship the Bank offers discount
brokerage services. The Bank does not provide trust services; does not sell
annuities; and does not sell mutual funds.
The majority of the Bank's customers are individuals and small to
medium-sized businesses headquartered within the Bank's service area. The
Bank has no material concentration of deposits from any single customer or
group of customers. No significant portion of the Bank's loans is
concentrated within a single industry or group of related industries. There
are no material seasonal factors that would have any adverse effect on the
Bank nor does the Bank rely on foreign sources of funds or income.
COMPETITION
The Bank actively competes with other institutions in Horry County in
providing customers with deposit, credit and other financial services. The
principal competitors of the Bank include local offices of five regional
banks, two state-wide banks, six locally owned banks in Horry County and
various other financial and thrift institutions. The regional banks with
offices in Horry County are Nationsbank of S.C., First Union National Bank of
S.C., First Citizens Bank and Trust Company, Branch Bank and Trust of S.C.
and Wachovia, N.A. of S.C.. The statewide banks with offices in Horry
County are National Bank of South Carolina and Carolina First Savings Bank.
The locally owned banks having offices in Horry County are The Anchor Bank of
Myrtle Beach, Anderson Brothers Bank, Coastal Federal Savings Bank, Horry
County State Bank, First National South Bank, and Beach First National Bank.
In addition, one thrift institution has offices in Horry County. The Bank
also competes with credit unions, money market funds, brokerage houses,
insurance companies, mortgage companies, leasing companies, consumer finance
companies and other financial institutions. Significant competitive factors
include interest rates on loans and deposits, prices and fees for services,
office location, customer service, community reputation, and continuity of
personnel.
SUPERVISION AND REGULATION
General
The Company and the Bank are subject to an extensive collection of state and
federal banking laws and regulations which impose specific requirements and
restrictions on, and provide for general regulatory oversight with respect
to, virtually all aspects of the Company's and the Bank's operations. The
Company and the Bank are also affected by government monetary policy and by
regulatory measures affecting the banking industry in general. The actions
of the Federal Reserve System affect the money supply and, in general,
the Bank's lending abilities in increasing or decreasing the cost and
availability of funds to the Bank. Additionally, the Federal Reserve System
regulates the availability of bank credit in order to combat recession and
curb inflationary pressures in the economy by open market operations in
United States government securities, changes in the discount rate on member
bank borrowings, and changes in the reserve requirements against bank
deposits.
2
During 1989 and 1991, the United States Congress enacted two major pieces of
banking legislation: The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FIRREA and FDICIA have
significantly changed the commercial banking industry through, among other
things, revising and limiting the types and amounts of investment authority,
significantly increasing minimum regulatory capital requirements, and
broadening the scope and power of federal bank and thrift regulators over
financial institutions and affiliated persons in order to protect the deposit
insurance funds and depositors. These laws, and the resulting implementing
regulations, have subjected the Bank and the Company to extensive regulation,
supervision and examination by the Office of the Comptroller of the Currency
(OCC). This has resulted in increased administrative, professional and
compensation expenses in complying with a substantially increased number of
new regulations and policies. The regulatory structure created by these laws
gives the regulatory authorities extensive authority in connection with their
supervisory and enforcement activities and examination policies.
The Omnibus Consolidated Appropriations Act was enacted on September 30,
1996. Among the law's many provisions is a resolution of the BIF-SAIF
deposit insurance premium disparity, many regulatory burden relief provisions
and other bank-related legislation. The BIF-SAIF provisions are contained in
the Deposit Insurance Funds Act of 1996. The BIF and SAIF will be merged on
January 1, 1999 into a new Deposit Insurance Fund, provided "no insured
depository institution is a savings association on that date". Currently,
there is no assurance that Congress will act on charter issues in time for a
merger of funds by the date prescribed in the legislation.
The following is a brief summary of certain statutes, rules and regulations
affecting the Company and the Bank. This summary is qualified in its
entirety by reference to the particular statutory and regulatory provisions
referred to below and is not intended to be an exhaustive description of the
statutes or regulations applicable to the business of the Company and the
Bank. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company and the Bank.
The Company
The Company is a bank holding company within the meaning of the Federal Bank
Holding Company Act of 1956, as amended (the "BHCA") and is registered as
such with the Federal Reserve. The Company is required to file annual
reports and other information regarding its business operations and those of
its subsidiaries. It is also subject to supervision and regular
examinations.
The BHCA requires every bank holding company to obtain the prior approval of
the Federal Reserve Board before (i) it or any of its subsidiaries (other
than a bank) acquires substantially all of the assets of any bank, (ii) it
acquires ownership or control of any voting shares of any bank if after such
acquisition it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank, or (iii) it merges or consolidates with any
other bank holding company.
The BHCA and the Federal Change in Bank Control Act, together with
regulations promulgated by the Federal Reserve Board, require that, depending
on the particular circumstances, either the Federal Reserve Board's approval
must be obtained or notice must be furnished to the Federal Reserve Board and
not disapproved prior to any person or company acquiring control of a bank
holding company, such as the Company, subject to certain exemptions for
certain transactions.
3
Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting
shares of any company engaged in, nonbanking activities, unless the Federal
Reserve Board, by order or regulation, has found those activities to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board has
determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of
leases, engaging in certain insurance and discount brokerage activities,
performing certain data processing services, acting in certain circumstances
as a fiduciary or investment or financial adviser, owning savings
associations and making investments in certain corporations or projects
designed primarily to promote community welfare. The Company is also
restricted in its activities by the provisions of the Glass-Stegall Act of
1933, which prohibits the Company from owning subsidiaries that are engaged
principally in the issue, flotation, underwriting, public sale or
distribution of securities. The regulatory requirements to which the Company
is subject also set forth various conditions regarding the eligibility and
qualifications of its directors and officers.
The Bank
The Bank is subject to regulation and supervision, of which regular bank
examinations are a part, by the Comptroller of the Currency. The Bank is a
member of the Federal Deposit Insurance Corporation (the "FDIC") which
currently insures the deposits of each member bank to a maximum of $100,000
per depositor. For this protection, each bank pays a statutory assessment
and is subject to the rules and regulations of the FDIC. The Company is an
"affiliate" of the Bank within the meaning of the Federal Reserve Act and the
Federal Deposit Insurance Act, which imposes restrictions on loans by any
subsidiary bank to the Company, on investments by any subsidiary bank in the
stock or securities of the Company and on the use of such stock or securities
as collateral security for loans by any subsidiary bank to any borrower. The
Company will also be subject to certain restrictions with respect to engaging
in the business of issuing, underwriting and distributing securities.
4
DESCRIPTION OF BANK STOCK
The Bank is authorized to issue 199,536 shares and has outstanding 193,536
shares of Bank Stock. The holders of Bank Stock are entitled to one vote per
share. Holders of shares of Bank Stock have preemptive rights to purchase
additional shares of Bank Stock and have cumulative rights in the elections
of directors of the Bank. The National Bank Act generally provides for a
majority vote of the Bank Stock to approve an action by the Bank but a two-
thirds vote of the outstanding shares of Bank Stock is required to approve
certain fundamental changes.
The National Bank Act, 12 U.S.C. Section 55, provides for the pro rata
assessment of holders of common stock of a national bank in the event that
its capital becomes impaired, such assessment to be enforced by sale to the
extent necessary of the stock of the stockholder failing to pay his
assessment. However, the Company has been advised that the Comptroller of
the Currency has not used this provision in recent years. Accordingly, the
shares of Bank Stock are subject to such assessment. However, the Bank's
management does not anticipate the Bank Stock being assessed in this manner
in the foreseeable future.
The holders of Bank Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Bank out of funds legally available
therefor. National banking laws and regulations impose restrictions on the
payment of dividends and other distributions to stockholders. The National
Bank Act provides that a national bank cannot pay dividends or other
distributions to stockholders out of any portion of its capital and surplus,
and that no dividend shall be paid by a bank in an amount greater than its
"net profits then on hand" (as defined in the National Bank Act), after
deduction of statutory "bad debts." In addition, 12 U.S.C. Section 60
provides that the approval of the Comptroller of the Currency is required for
the payment of dividends by a national bank if the total of all dividends
declared by the bank in any calendar year shall exceed the total of its "net
profits" of that year combined with its "retained net profits" of the
preceding two years. The same section further provides that, until the
surplus fund of a national bank shall equal its common capital, no dividends
shall be declared unless there has been carried to the surplus fund not less
than one-tenth part of the bank's net profits of the preceding half year in
the case of quarterly or semiannual dividends, or not less than one-tenth
part of its net dividends. Also, under 12 U.S.C. Section 1818, the
Comptroller of the Currency can restrict a national bank's dividend payments
if they are deemed an unsafe or unsound banking practice.
In the event of the liquidation, dissolution or winding-up of the affairs of
the Bank, the holders of outstanding shares of Bank Stock will be entitled to
share pro rata according to their respective interests in the Bank's assets
and funds remaining after payment or provision for payment of all debts and
other liabilities of the Bank.
5
DESCRIPTION OF COMPANY STOCK
General
The Company is authorized to issue 1,500,000 shares of Company Stock and as
of December 31, 1997, has 598,681 shares issued and 598,142 shares
outstanding. The holders of Company Stock are entitled to one vote per share.
Holders of shares of Company Stock do not have pre-emptive rights to
purchase any additional shares of Company Stock and do not have cumulative
voting rights in the election of directors. Without pre-emptive rights,
stockholders could experience dilution of their voting power and of their
equity interest in the Company.
The ability of the Company to pay dividends to the holders of the Company
Stock depends upon the amount of dividends paid by the Bank to the Company.
The holders of shares of Company Stock will be entitled to receive such
dividends as may be declared by the Board of Directors of the Company out of
the funds legally available therefor. The payment of dividends by the
company are subject to the restrictions of South Carolina laws applicable to
the declaration of dividends by a business corporation. Under such
provisions, dividends may be paid in cash or in property of the Company,
including the shares of other corporations, except when the Company is
insolvent or would thereby be made insolvent or when the declaration of
payment thereof would be contrary to any restrictions in the Company
Articles. Dividends may be declared and paid only out of the unreserved and
unrestricted earned surplus of the Company.
In the event of the liquidation, dissolution or winding-up of the affairs of
the Company, the holders of outstanding shares of Company Stock will be
entitled to share pro rata according to their respective interests in the
Company's assets and funds remaining after payment or provision for payment
of all debts and other liabilities of the Company.
All shares of Company Stock are fully paid and nonassessable.
The Bank is the transfer agent for shares of Company Stock.
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.
6
SUPPLEMENTARY DATA
QUARTERLY SHAREHOLDER INFORMATION
CNB CORPORATION
QUARTERLY SHAREHOLDER INFORMATION
(All Dollar Amounts, Except Per Share Data, in Thousands)
Summary of Operating Results by Quarter
Quarter Ended
1997 March 31 June 30 September 30 December 31
Interest income $ 6,520 $ 6,813 $ 7,108 $ 7,318
Interest expense 2,798 2,923 3,022 3,021
Net interest income 3,722 3,890 4,086 4,297
Provision for loan losses 240 210 150 200
Net interest income after
provision for loan losses 3,482 3,680 3,936 4,097
Other income 775 871 993 774
Other expenses 2,541 2,687 2,621 3,192
Income before income taxes 1,716 1,864 2,308 1,679
Income taxes 603 712 805 640
Net income $ 1,113 $ 1,152 $ 1,503 $ 1,039
Net income per share $ 1.86 $ 1.92 $ 2.51 $ 1.74
Weighted average shares outstanding 598,198 598,604 598,812 598,126
1996
Interest income $ 5,841 $ 6,012 $ 6,196 $ 6,447
Interest expense 2,675 2,634 2,631 2,639
Net interest income 3,166 3,378 3,565 3,808
Provision for loan losses 50 90 90 130
Net interest income after
provision for loan losses 3,116 3,288 3,475 3,678
Other income 742 740 846 687
Other expenses 2,481 2,574 2,489 2,849
Income before income taxes 1,377 1,454 1,832 1,516
Income taxes 450 498 611 536
Net income $ 927 $ 956 $ 1,221 $ 980
Net income per share $ 1.55 $ 1.60 $ 2.05 $ 1.64
Weighted average shares outstanding 596,551 596,571 596,630 597,727
SUPPLEMENTARY INFLATION ADJUSTED FINANCIAL DATA
Inflation-adjusted accounting has not been applied to the Company's financial
information as management does not believe this type of analysis provides
useful information within the financial services industry. The Company
currently does not meet the asset size criteria which would make detailed
disclosure of inflation adjusted data mandatory.
GUIDE 3. STATISTICAL DISCLOSURE BY BANK
HOLDING COMPANIES
The following tables present additional statistical information about CNB
Corporation and its operation and financial condition and should be read in
conjunction with the consolidated financial statements and related notes
thereto contained elsewhere in this report.
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
The tables on the following 5 pages present selected financial data and an
analysis of net interest income.
7
CNB Corporation and Subsidiary
Selected Financial Data
Twelve Months Ended 12/31/97
Average Interest Avg. Annual
Balance Income/ Yield or
Expense(2) Rate
Assets:
Earning assets
Loans, net of
unearned income $204,987 $19,110 9.32%
Investment securities:
Taxable 118,900 7,191 6.05
Tax-exempt 13,841 1,083 7.82
Federal funds sold and
securities purchased under
agreement to resell 13,730 743 5.41
Total earning assets $351,458 $28,127 8.00
Other assets 24,531
Total assets $375,989
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits $241,009 10,009 4.15
Federal funds purchased and
securities sold under
agreement to repurchase 36,148 1,676 4.64
Other short-term borrowings 1,562 79 5.06
Total interest-bearing
liabilities $278,719 $11,764 4.22
Noninterest-bearing deposits 57,645
Other liabilities 3,130
Stockholders' equity 36,495
Total liabilities and
stockholders' equity $375,989
Net interest income as a
percent of total
earning assets $351,458 $16,363 4.66%
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 368
Ratios:
Annualized return on average total assets 1.28%
Annualized return on average stockholders' equity 13.17
Cash dividends declared as a percent of net income 37.32
Average stockholders' equity as a percent of:
Average total assets 9.71
Average total deposits 12.22
Average loans, net of unearned income 17.80
Average earning assets as a percent of
average total assets 93.48%
(2) The Company had no out-of-period adjustments or foreign activities.
Loan fees of $0 are included in the above interest income. Loans on
a non-accrual basis for the recognition of interest income totalling
$24 as of December 31, 1997 are included in loans, net of unearned
income, for purpose of this analysis.
8
CNB Corporation and Subsidiary
Selected Financial Data
Twelve Months Ended 12/31/96
Average Interest Avg. Annual
Balance Income/ Yield or
Expense(2) Rate
Assets:
Earning assets
Loans, net of
unearned income $169,815 $15,808 9.31%
Investment securities:
Taxable 126,368 7,488 5.93
Tax-exempt 13,999 1,121 8.01
Federal funds sold and
securities purchased under
agreement to resell 8,626 460 5.33
Total earning assets $318,808 $24,877 7.80
Other assets 23,374
Total assets $342,182
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits $214,194 8,610 4.02
Federal funds purchased and
securities sold under
agreement to repurchase 39,506 1,906 4.82
Other short-term borrowings 1,164 63 5.41
Total interest-bearing
liabilities $254,864 $10,579 4.15
Noninterest-bearing deposits 51,249
Other liabilities 2,449
Stockholders' equity 33,620
Total liabilities and
stockholders' equity $342,182
Net interest income as a
percent of total
earning assets $318,808 $14,298 4.48%
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 381
Ratios:
Annualized return on average total assets 1.19%
Annualized return on average stockholders' equity 12.15
Cash dividends declared as a percent of net income 35.09
Average stockholders' equity as a percent of:
Average total assets 9.83
Average total deposits 12.67
Average loans, net of unearned income 19.80
Average earning assets as a percent of
average total assets 93.17%
(2) The Company had no out-of-period adjustments or foreign activities.
Loan fees of $0 are included in the above interest income. Loans on
a non-accrual basis for the recognition of interest income totalling
$377 as of December 31, 1996 are included in loans, net of unearned
income, for purpose of this analysis.
9
CNB Corporation and Subsidiary
Selected Financial Data
Twelve Months Ended 12/31/95
Average Interest Avg. Annual
Balance Income/ Yield or
Expense(2) Rate
Assets:
Earning assets
Loans, net of
unearned income $149,940 $14,070 9.38%
Investment securities:
Taxable 114,801 6,762 5.89
Tax-exempt 14,525 1,344 9.25
Federal funds sold and
securities purchased under
agreement to resell 15,136 882 5.83
Total earning assets $294,402 $23,058 7.83
Other assets 21,600
Total assets $316,002
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits $196,195 8,032 4.09
Federal funds purchased and
securities sold under
agreement to repurchase 39,332 2,002 5.09
Other short-term borrowings 1,439 81 5.63
Total interest-bearing
liabilities $236,966 $10,115 4.27
Noninterest-bearing deposits 45,839
Other liabilities 2,084
Stockholders' equity 31,113
Total liabilities and
stockholders' equity $316,002
Net interest income as a
percent of total
earning assets $294,402 $12,943 4.40%
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 457
Ratios:
Annualized return on average total assets 1.19%
Annualized return on average stockholders' equity 12.15
Cash dividends declared as a percent of net income 38.13
Average stockholders' equity as a percent of:
Average total assets 9.85
Average total deposits 12.85
Average loans, net of unearned income 20.75
Average earning assets as a percent of
average total assets 93.16%
(2) The Company had no out-of-period adjustments or foreign activities.
Loan fees of $0 are included in the above interest income. Loans on
a non-accrual basis for the recognition of interest income totalling
$479 as of December 31, 1995 are included in loans, net of unearned
income, for purpose of this analysis.
10
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Twelve Months Ended December 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) 204,987 169,815 9.32% 9.31% 19,110 15,808 3,302 17 3,281 4
Investment securities:
Taxable 118,900 126,368 6.05% 5.93% 7,191 7,488 (297) 152 (440) (9)
Tax-exempt 13,841 13,999 7.82% 8.01% 1,083 1,121 (38) (26) (13) 1
Federal funds sold and
securities purchased under
agreement to resell 13,730 8,626 5.41% 5.33% 743 460 283 7 272 4
Total Earning Assets 351,458 318,808 8.00% 7.80% 28,127 24,877 3,250 150 3,100 -
Interest-bearing Liabilities:
Interest-bearing deposits 241,009 214,194 4.15% 4.02% 10,009 8,610 1,399 278 1,086 35
Federal funds purchased and
securities sold under
agreement to repurchase 36,148 39,506 4.64% 4.82% 1,676 1,906 (230) (71) (165) 6
Other short-term borrowings 1,562 1,164 5.06% 5.41% 79 63 16 (4) 21 (1)
Total Interest-bearing
Liabilities 278,719 254,864 4.22% 4.15% 11,764 10,579 1,185 203 942 40
Interest-free Funds
Supporting Earning Assets 72,739 63,944
Total Funds Supporting
Earning Assets 351,458 318,808 3.34% 3.32% 11,764 10,579 1,185 203 942 40
Interest Rate Spread 3.78% 3.65%
Impact of Non-interest-bearing
Funds on Net Yield on Earning
Assets .88% .83%
Net Yield on Earning Assets 4.66% 4.48% 16,363 14,298
(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.
11
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Twelve Months Ended December 31, 1996 and 1995
(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
1996 1995 1996 (1) 1995 (1) 1996 (1) 1995 (1) Variance Rate Volume Volume
Earning Assets:
Loans, Net of unearned
income (2) 169,815 149,940 9.31% 9.38% 15,808 14,070 1,738 (105) 1,857 (14)
Investment securities:
Taxable 126,368 114,801 5.93% 5.89% 7,488 6,762 726 46 675 5
Tax-exempt 13,999 14,525 8.01% 9.25% 1,121 1,344 (223) (180) (50) 7
Federal funds sold and
securities purchased under
agreement to resell 8,626 15,136 5.33% 5.83% 460 882 (422) (76) (379) 33
Total Earning Assets 318,808 294,402 7.80% 7.83% 24,877 23,058 1,819 (315) 2,103 31
Interest-bearing Liabilities:
Interest-bearing deposits 214,194 196,195 4.02% 4.09% 8,610 8,032 578 (137) 728 (13)
Federal funds purchased and
securities sold under
agreement to repurchase 39,506 39,332 4.82% 5.09% 1,906 2,002 (96) (106) 10 -
Other short-term borrowings 1,164 1,439 5.41% 5.63% 63 81 (18) (3) (16) 1
Total Interest-bearing
Liabilities 254,864 236,966 4.15% 4.27% 10,579 10,115 464 (246) 722 (12)
Interest-free Funds
Supporting Earning Assets 63,944 57,436
Total Funds Supporting
Earning Assets 318,808 294,402 3.32% 3.43% 10,579 10,115 464 (246) 722 (12)
Interest Rate Spread 3.65% 3.56%
Impact of Non-interest-bearing
Funds on Net Yield on Earning
Assets .83% .84%
Net Yield on Earning Assets 4.48% 4.40% 14,298 12,943
(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.
12
INVESTMENT SECURITIES
Investment securities with a par value of $69,965, $55,665, and $66,115 at
December 31, 1997, 1996, and 1995, respectively, 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 on investment securities
at December 31, 1997, 1996, and 1995.
December 31, 1997
Book Unrealized Fair
Value Gains Losses Value Yield(1)
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%
(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.
13
INVESTMENT SECURITIES, continued
December 31, 1996
Book Unrealized 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
One to five years 29,072 48 169 28,951 6.04%
After ten years 784 - 18 766 6.08%
29,856 48 187 29,717 6.04%
State, county and municipal
One to five years 326 12 - 338 7.85%
Other-restricted
Federal Reserve
Bank Stock 116 - - 116 6.03%
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
One to five years 13,320 97 110 13,307 6.27%
Six to ten years 2,002 - 35 1,967 6.40%
15,332 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 - 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.
14
INVESTMENT SECURITIES, continued
December 31, 1995
Book Unrealized Fair
Value Gains Losses Value Yield(1)
AVAILABLE FOR SALE
United States Treasury
Within one year $11,022 $ 19 $ 21 $11,020 5.04%
One to five years 28,674 591 37 29,228 6.31%
36,696 610 58 40,248 5.96%
Federal agencies
Within one year 417 3 - 420 7.98%
One to five years 20,181 179 19 20,341 5.94%
After ten years 913 1 15 899 6.34%
21,511 183 34 21,660 6.00%
State, county and municipal
One to five years 326 16 - 342 7.85%
Other-restricted
Federal Revenue
Bank Stock 116 - - 116 6.03%
Total available
for sale $61,649 $ 809 $ 92 $62,366 5.98%
HELD TO MATURITY
United States Treasury
Within one year $13,077 $ 59 $ 5 $13,131 5.85%
One to five years 38,875 378 145 39,108 5.48%
51,952 437 150 52,239 5.57%
Federal agencies
Within one year 5,007 69 - 5,076 8.04%
One to five years 3,004 65 - 3,069 6.12%
Six to ten years 2,002 34 - 2,036 6.40%
10,013 168 - 10,181 7.14%
State, county and municipal
Within one year 1,674 17 1 1,690 9.33%
One to five years 6,216 273 8 6,481 8.81%
Six to ten years 6,069 120 35 6,154 7.28%
After ten years 478 8 - 486 7.61%
14,437 418 44 14,811 8.19%
Total held to maturity $76,402 $1,023 $ 194 $77,231 6.27%
(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended December 31, 1995, the Bank did not hold any
securities of an issuer that exceeded 10% of stockholders' equity.
On December 6, 1995, the Bank transferred a portion of the portfolio from
securities held to maturity to the available for sale classification. These
securities had an amortized cost of $11,566,000 and an unrealized loss of
$68,000 on the date of transfer. This one-time reassessment of securities
was done in compliance with the "Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," issued by
the Financial Accounting Standards Board.
15
LOAN PORTFOLIO
CLASSIFICATION OF LOANS
The following is a summary of loans, in thousands of dollars, at December 31,
1997, 1996, 1995, 1994, and 1993 by major classification:
1997 1996 1995 1994 1993
Real estate Loans - mortgage $136,441 $111,474 $ 95,451 $ 89,728 $ 84,806
- construction 19,653 15,148 5,453 6,328 4,051
Loans to farmers 1,214 1,328 1,032 1,180 971
Commercial and industrial loans 34,606 28,105 23,133 17,472 14,612
Loans to individuals for household
family and other consumer
expenditure 30,772 29,642 28,095 30,700 28,493
All other loans, including
overdrafts 140 236 334 186 87
Gross Loans 222,826 185,933 153,498 145,594 133,020
Less unearned income (1,105) (1,058) (1,094) (1,231) (1,286)
Less reserve for loan losses (2,879) (2,370) (2,242) (2,220) (2,170)
Net loans $218,842 $182,505 $150,162 $142,143 $129,564
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The Company's loan portfolio consisted of approximately $160,088 and $129,833
in fixed rate loans as of December 31, 1997 and 1996, respectively. At
December 31, 1997, and 1996, fixed rate loans with maturities in excess of
one year amounted to approximately $119,281 and $93,017, respectively.
Variable rate loans are those on which the interest rate can be adjusted to
changes in the Bank's prime rate. Fixed rate loans are those on which the
interest rate generally cannot be changed for the term of the loan.
16
RISK ELEMENTS
The following information relates to certain assets which are defined as
risk elements by the Securities and Exchange Commission. All loans which
meet the criteria set forth by the Securities and Exchange Commission are
detailed below, regardless of the likelihood of collection in full or in
part. All loans classified for regulatory purposes as loss, doubtful,
substandard, or especially mentioned that have not been disclosed do not
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or
capital resources or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrower to comply with the loan repayment terms. As a
matter of practice, loans which management has serious concerns about the
borrower being able to pay are put into a non-accrual status and disclosed
under Risk Elements. Management reviews these loans periodically and feels
that the current reserve for possible loan losses more than adequately
provides coverage for actual loss potential. Other interest-bearing assets
considered a risk element are also detailed in this section.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following schedule summarizes the amount of nonaccrual, past due, and
restructured loans, in thousands of dollars, for the periods ended December
1997, 1996, 1995, 1994, 1993:
December 31,
1997 1996 1995 1994 1993
Nonaccrual loans $ 24 $ 377 $ 479 $1,062 $1,015
Accruing loans which are
contractually past due
90 days or more as to
principal or interest
payments $ 135 $ 77 $ 87 $ 55 $ 221
Restructed trouble debt None None None None None
Information relating to interest income on nonaccrual and renegotiated loans
outstanding for the year ended December 31, 1997, 1996, and 1995 is as
follows:
1997 1996 1995
Interest included in income during the
year $ 1 $ 7 $ 2
Interest which would have been included
at the original contract rates $ 3 $ 45 $ 60
Loans are placed in a non-accrual status when, in the opinion of management,
the collection of additional interest is questionable. Thereafter no
interest is taken into income unless received in cash or until such time as
the borrower demonstrates the ability to pay principal and interest.
17
POTENTIAL PROBLEM LOANS
In addition to those loans disclosed under "Risk Elements", there are certain
loans in the portfolio which are presently current but about which management
has concerns regarding the ability of the borrower to comply with present
loan repayment terms. Management maintains a loan review of the total loan
portfolio to identify loans where there is concern that the borrower will not
be able to continue to satisfy present loan repayment terms. Such problem
loan identification includes the review of individual loans, loss experience,
and economic conditions. Problem loans include both current and past due
loans.
As of December 31, 1997, loans which management had serious concerns about
the borrower being able to repay were put into a non-accrual status which are
disclosed under "Risk Elements".
FOREIGN OUTSTANDINGS
As of the year ended December 31, 1997, the Company had no foreign loans
outstanding.
LOAN CONCENTRATIONS
As of the year ended December 31, 1997, the Company did not have any
concentration of loans exceeding 10% of total loans which are not otherwise
disclosed as a category of loans pursuant to Item III. A. of Guide 3.
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 is 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.
The Bank's independent external auditors have revisited the facts and
circumstances regarding the investment in the COLI program and have read the
significant uncertainties requiring the recognition of a loss contingency as
of the date of this report.
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 December 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.
18
SUMMARY OF LOAN LOSS EXPERIENCE
Loan loss experience for each reported period, in thousands of dollars, is
summarized as follows:
Year Ended December 31,
1997 1996 1995 1994 1993
Loans (net of unearned income):
Average loans outstanding for
the period $204,987 $169,815 $149,940 $140,104 $131,599
Reserve for loan losses:
Balance at beginning
of period $ 2,370 $ 2,242 $ 2,220 $ 2,170 $ 2,029
Charge-offs:
Commercial, financial, and
agricultural 238 111 133 122 174
Real Estate - construction
and mortgage 5 22 3 57 211
Loans to individuals 399 296 313 277 222
Total charge-offs $ 642 $ 429 $ 449 $ 456 $ 607
Recoveries:
Commercial, financial, and
agricultural 100 47 166 58 96
Real estate-construction
and mortgage 106 15 44 35 108
Loans to individuals 145 135 151 118 99
Total recoveries $ 351 $ 197 $ 361 $ 211 $ 303
Net charge-offs $ 291 $ 232 $ 88 $ 245 $ 304
Additions charged to operations $ 800 $ 360 $ 110 $ 295 $ 445
Balance at end of period $ 2,879 $ 2,370 $ 2,242 $ 2,220 $ 2,170
Ratio of net charge-offs during
the period to average loans
outstanding during the period .14% .14% .06% .17% .23%
[FN]
The reserve for loan losses is maintained at the greater of 1.20% of net
loans or an amount that bears the same ratio to eligible loans as net
charge-offs to average eligible loans over the past six years. In addition,
the Asset/ Liability Management Committee and the Loan Committee review the
adequacy of the reserve quarterly and make recommendations as to the desired
amount of the reserve. Determination of the adequacy of the reserve is based
on the above ratios and, but not limited to, considerations of classified and
internally-identified problem loans, the current trend in delinquencies, the
volume of past-due loans, and current or expected economic conditions. Based
upon these factors, net charge-offs are anticipated to be approximately $350
during 1998.
</FN>
19
DEPOSITS
AVERAGE DEPOSITS BY CLASSIFICATION
The following table sets forth the classification of average deposits for the
indicated period, in the thousands of dollars:
Years Ended December 31,
1997 1996 1995
Noninterest bearing demand deposits 57,645 51,249 45,839
Interest bearing demand deposits 45,844 44,886 43,415
Savings deposits 29,894 31,375 33,512
Time deposits 165,271 137,733 119,268
Total deposits 298,654 265,443 242,034
AVERAGE RATES PAID ON DEPOSITS
The following table sets forth average rates paid on categories of
interest-bearing deposits for the periods indicated:
Years Ended December 31,
1997 1996 1995
Interest bearing demand deposits 1.70% 1.70% 2.12%
Savings deposits 2.70% 2.79% 3.28%
Time deposits 5.10% 5.06% 5.04%
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth the maturity of time deposits of $100,000 or
more, in thousands of dollars, at December 31, 1997:
Time Certificates of Deposit
Maturity within 3 months or less $20,196
Over 3 through 6 months 10,235
Over 6 through 12 months 15,754
Over 12 months 10,120
Total 56,305
20
RETURN ON EQUITY AND ASSETS
The following table presents certain ratios relating to the Company's equity
and assets:
Year ended December 31,
1997 1996 1995
Return on average total assets 1.28% 1.19% 1.19%
Return on average stockholders' equity 13.17% 12.15% 12.07%
Cash dividend payout ratio 37.32% 35.09% 38.13%
Average equity to average assets ratio 9.71% 9.83% 9.85%
SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under repurchase agreements are
short-term borrowings which generally mature within 90 days from the dates of
issuance. No other category of short-term borrowings had an average balance
outstanding during the reported period which represented 30 percent or more
of stockholders' equity at the end of the period.
The following is a summary of short-term borrowings at December 31 of each
reported period, in thousands of dollars:
December 31,
Federal funds purchased
and securities sold under 1997 1996 1995
agreement to repurchase $32,366 $33,018 $36,935
The following information relates to short-term borrowings outstanding during
1997, 1996, and 1995:
Maximum Amount Weighted Average
Outstanding in Any Interest Rate
Month End at December 31,
1997 1996 1995 1997 1996 1995
Federal funds
purchased and
securities sold
under agreement
to repurchase $49,506 $45,333 $47,707 4.61% 4.81% 5.10%
Year ended December 31,
1997 1996 1995
Federal funds purchased and
securities sold under
agreement to repurchase-
average daily amount outstanding $36,148 $39,506 $39,332
Weighted average interest rate paid 4.64% 4.82% 5.09%
21
ITEM 2. PROPERTIES
The Company's subsidiary, The Conway National Bank, has nine
permanent offices in Horry County. The principal office, located at
1400 Third Avenue in Conway, houses the Bank's administrative
offices and data processing facilities. This three-story
structure, which was significantly expanded in 1982, contains
approximately 33,616 square feet. In addition, the Bank has a 632
square foot building for express banking services adjacent to the
principal office. The Bank has a two-story office on Main Street in
Conway containing 8,424 square feet. Bank offices are housed in
one-story facilities at the Coastal Centre in Conway (3,500 square
feet with an adjacent 675 square foot building for express banking
services), Red Hill in Conway (3,760 square feet), Surfside in
Surfside Beach (6,339 square feet), Northside, north of Myrtle Beach
(2,432 square feet), Socastee in the southern portion of Myrtle
Beach (3,498 square feet), Aynor in The Town of Aynor (2,809 square
feet), and Myrtle Beach in the City of Myrtle Beach (12,000 square
feet). Of the nine offices, the bank owns the principal office,
the office at Red Hill, Northside, Main Street, Socastee, Aynor, and
Myrtle Beach. All other facilities are leased by the Bank under
long-term leases with renewal options. In addition to the existing
facilities, the Company has purchased, or contracted to purchase,
three future office sites. The sites consist of approximately 1.5
acres on Highway 17 south of Myrtle Beach in Murrells Inlet, 1.4
acres on Highway 501 northwest of Conway, and 1.1 acres on Highway
701 north of Conway. An office is scheduled to be constructed and
opened on the Highway 501 property during the third quarter of 1998.
The company also anticipates building an office on one of the other
two sites within the next two years, depending on market conditions.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings against the Company or its
subsidiary, The Conway National Bank, as of December 31, 1997.
There were no administrative or judicial proceedings arising under
Section 8 of the Federal Deposit Insurance Act.
There were no material proceedings to which any director, officer,
or owner of record of more than 5% of the voting securities of the
Company or any associate is a party adverse to the Company.
There are other legal proceedings pending against the Company or its
subsidiary, The Conway National Bank, in the ordinary course of
business. In the opinion of management, based upon the opinion of
counsel, liabilities arising from these proceedings, if any, would
not have a material adverse effect on the financial position of the
Company.
22
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 13, 1997, at the Annual Meeting of CNB Corporation, the
security holders:
1) Nominated and elected four directors to serve for a three-year
term;
2) Ratified the appointment of Elliott, Davis, and Company,
Certified Public Accountants, as independent auditors for the
Company and its subsidiary for the year ending December 31,
1997; and
3) Amended CNB Corporations' Articles of Incorporation to increase
the authorized number of shares of common stock to 1,500,000.
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
As of December 31, 1997, there were approximately 641 holders of
record of Company stock. There is no established market for shares
of Company stock and only limited trading in such shares has
occurred since the formation of the Company on June 10, 1985. Most
of the limited trading transactions have been effected through the
efforts of officers of the Company in matching interested purchasers
with shareholders who have expressed an interest in selling their
shares of Company stock. Some private trading of Company stock has
occurred without any participation in the transaction by the
officers of the Company other than to effect the transfer on the
Company's shareholder records. Accordingly, management of the
Company is not aware of the prices at which all shares of Company
stock have traded. The following table sets forth the prices known
to management of the Company at which shares of Company stock have
traded in each quarter within the two most recent fiscal years
adjusted for the effect of a 25% stock dividend paid during 1997.
1997 1996
High Low High Low
First Quarter $76.80 $76.80 $71.00 $71.00
Second Quarter $84.00 $76.80 $74.60 $71.00
Third Quarter $84.00 $84.00 $74.60 $74.60
Fourth Quarter $90.00 $84.00 $76.80 $74.60
Holders of shares of Company stock are entitled to such dividends as
may be declared from time to time by the Board of Directors of
the Company. The Company paid an annual cash dividend of $3.00 per
share in 1997, 1996 and 1995, $2.00 per share in 1994, 1993 and
1992, $1.50 per share in 1991, and $1.00 per share in the years
1985 through 1990. In addition, the Company may from time to time
pay a stock dividend. The Company paid a 25% stock dividend in
September, 1997, a 20% stock dividend in September, 1994, a 50%
stock dividend in July, 1989, a 20% stock dividend in August, 1987
and a 15% stock dividend in November, 1985. There can be no
assurance, however, as to the payment of dividends by the Company in
the future since payment will be dependent upon the earnings
and financial condition of the Company and the Bank and other
related factors.
23
ITEM 6. SELECTED FINANCIAL DATA
CNB Corporation
FINANCIAL SUMMARY
(All Dollar Amounts, Except Per Share Data, in Thousands)
The following table sets forth certain selected financial data
relating to the Company and subsidiary and is qualified in its
entirety by reference to the more detailed financial
statements of the Company and subsidiary and notes thereto
included elsewhere in this report.
Year Ended December 31,
1997 1996 1995 1994 1993
Selected Income Statement Data:
Total Interest Income $ 27,759 $ 24,496 $ 22,601 $ 19,847 $ 18,719
Total Interest Expense 11,764 10,579 10,115 7,613 7,369
Net Interest Income 15,995 13,917 12,486 12,234 11,350
Provision for Possible Loan Losses 800 360 110 295 445
Net Interest Income after
Provision for Possible Loan
Losses 15,195 13,557 12,376 11,939 10,905
Total Other Operating Income 3,413 3,015 2,954 2,814 2,735
Total Other Operating Expense 11,041 10,393 9,797 9,599 8,850
Income Before Income Taxes 7,567 6,179 5,533 5,154 4,790
Income Taxes 2,760 2,095 1,777 1,657 1,493
Net Income $ 4,807 $ 4,084 $ 3,756 $ 3,497 $ 3,297
Per Share:
Net Income Per Weighted Average
Shares Outstanding* $ 8.03 $ 6.84 $ 6.29 $ 5.87 $ 5.54
Cash Dividend Paid Per Share $ 3.00 $ 3.00 $ 3.00 $ 2.00 $ 2.00
Weighted Average Shares
Outstanding* 598,435 596,870 597,275 595,463 595,683
*Restated for stock dividend
Selected Balance Sheet Data:
Assets $381,144 $341,818 $324,694 $297,120 $283,380
Net Loans 218,842 182,505 150,162 142,143 129,564
Investment Securities 123,423 132,287 138,768 126,613 116,185
Federal Funds Sold 11,375 - 7,300 3,125 14,400
Deposits:
Non-Interest-Bearing $ 55,422 $ 49,911 $ 44,723 $ 40,986 $ 35,369
Interest-Bearing 245,905 218,502 206,433 193,207 183,933
Total Deposits $301,327 $268,413 $251,156 $234,193 $219,302
Stockholders' Equity $ 37,717 $ 34,496 $ 32,195 $ 28,857 $ 26,820
24
ITEM 7. 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 Company's financial
condition, results of operations, liquidity, and capital resources. The
following discussion should be read in conjunction with the Company's
financial statements and notes thereto and other detailed information
appearing elsewhere in this report.
Distribution of Assets and Liabilities
The Company maintains a conservative approach in determining the distribution
of assets and liabilities. Loans, net of unearned income, increased 21.3%
from $152,404 at December 31, 1995 to $184,875 at December 31, 1996; and
19.9% from December 31, 1996 to $221,721 at December 31, 1997. Loan growth
is attributed to overall business development efforts to meet business and
personal loan demand in our market area. Loan demand was strong in our
market area in 1996 and 1997 due to a strong local economy. Loans, net of
unearned income, increased as a percentage of total assets from 46.9% at
year-end 1995 to 54.1% at year-end 1996 to 58.2% at year-end 1997.
Correspondingly, investment securities and federal funds sold decreased as a
percentage of total assets from 45.0% at year-end 1995 to 38.7% at year-end
1996 to 35.3% at year-end 1997 as investments have been utilized to fund the
growth in loan outstandings. Investments and federal funds sold provide for
an adequate supply of secondary liquidity. Year-end other assets as a
percentage of total assets decreased from 8.1% in 1995 to 7.2% in 1996 to
6.5% in 1997 as the Bank grew into its expanded infrastructure. Management
has sought to build the deposit base with stable, relatively non-interest-
rate sensitive deposits by offering the small to medium account holders a
wide array of deposit instruments at competitve rates. Non-interest-bearing
demand deposits grew to 14.6% at December 31, 1996 from 13.8% at December 31,
1995, but flattened out to 14.5% at December 31, 1997. Demand deposits are
expected to decline over the long-term as more customers utilize interest-
bearing deposit and repo accounts. Interest-bearing liabilities as a
percentage of total assets have declined from 75.2% at December 31, 1995 to
74.3% at December 31, 1996 and December 31, 1997.
The following table sets forth the percentage relationship to total assets of
significant components of the Company's balance sheet as of December 31,
1997, 1996 and 1995:
December 31,
1997 1996 1995
Assets:
Earning assets
Loans, net of unearned income 58.2% 54.1% 46.9%
Investment securities:
Taxable 28.6 34.6 38.3
Tax-exempt 3.7 4.1 4.4
Federal funds sold and securities
purchased under agreement to resell 3.0 - 2.3
Other earning assets - - -
Total earning assets 93.5 92.8 91.9
Other assets 6.5 7.2 8.1
Total assets 100.0% 100.0% 100.0%
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits 64.5% 63.9% 63.6%
Federal funds purchased and securities
sold under agreement to repurchase 8.5 9.7 11.4
Other short-term borrowings 1.3 .7 .2
Total interest-bearing liabilities 74.3 74.3 75.2
Non-interest-bearing deposits 14.5 14.6 13.8
Other liabilities 1.3 1.0 1.1
Stockholders' equity 9.9 10.1 9.9
Total liabilities and stockholders'equity 100.0% 100.0% 100.0%
25
Results of Operation
CNB Corporation and subsidiary experienced earnings in 1997, 1996 and 1995 of
$4,807, $4,084 and $3,756, respectively, resulting in a return of average
assets of 1.28%, 1.19%, and 1.19% and a return on average stockholders'
equity of 13.17%, 12.15% and 12.07%. The earnings were primarily attributable
to favorable 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). These strong
earnings, coupled with a conservative dividend policy, have supplied the
necessary capital funds to support bank operations. Total assets were
$381,144 at December 31, 1997 as compared to $341,818 at December 31,
1996 and $324,694 at December 31, 1995. The following table sets forth the
financial highlights for fiscal years 1997, 1996, and 1995.
26
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
December 31, 1996 to 1997 December 31, 1995 to 1996 December 31,
1997 Percent 1996 Percent 1995
Increase Increase
(Decrease) (Decrease)
Net interest
income after
provision for
loan losses $ 15,195 12.1% $ 13,557 9.5% $ 12,376
Income before
income taxes 7,567 22.5 6,179 11.7 5,533
Net Income 4,807 17.7 4,084 8.7 3,756
Per share
(weighted
average of
shares
outstanding)* $ 8.03 17.4 $ 6.84 8.7 $ 6.29
Cash dividends
declared 1,794 25.2 1,433 .1 1,432
Per share $ 3.00 - $ 3.00 - $ 3.00
Total assets $381,144 11.5% $341,818 5.3% $324,694
Total deposits 301,327 12.3 268,413 6.9 251,156
Loans, net of
unearned income 221,721 19.9 184,875 21.3 152,404
Investment
securities 123,423 (6.7) 132,287 (4.7) 138,768
Stockholders'
equity 37,717 9.3 34,496 7.1 32,195
Book value per
share* (actual
number of shares
outstanding) $ 63.06 9.2 $ 57.73 7.0 $ 53.94
*Restated for
stock dividend
Ratios(1):
Returns on
average total
assets 1.28% 7.6 1.19% - 1.19%
Return on
average
stockholders'
equity 13.17% 8.4 12.15% .7 12.07%
[FN]
(1) For the fiscal years ended December 31, 1997, 1996, and 1995, average
total assets amounted to $375,989, $342,182, and $316,002 with average
stockholders' equity totaling $36,495, $33,620, and $31,113, respectively.
</FN>
27
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
investment 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, investment securities,
deposits, and borrowed funds.
The Bank has maintained strong net interest margins in 1997,
1996 and 1995 by earning adequate yields on loans and
investments and funding these assets with a favorable deposit and
repurchase agreement mix. Fully-tax-equivalent net interest income
has grown from $12,943 in 1995 and $14,298 in 1996 to $16,363 in
1997. During the three-year period, total fully-tax-equivalent
interest income increased by 7.9% from $23,058 in 1995 to $24,877
in 1996 and increased 13.1% in 1997 to $28,127. Over the same
period, total interest expense increased by 4.6% from $10,115 in
1995 to $10,579 in 1996 and increased 11.2% to $11,764 in 1997.
Fully-tax-equivalent net interest income as a percentage of average
total earning assets has increased from 4.4% in 1995 to 4.5% in 1996
to 4.7% in 1997. These increases are reflective of strong loan
growth and higher loan to deposit ratios in 1996 and 1997.
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, 1996, and 1995. 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 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 long-run earning power.
The following table sets forth the Bank's rate sensitivity position
at each of the time intervals indicated. The table illustrates the
Bank's rate sensitivity position on specific dates and may not be
indicative of the position at other points in time. Management
believes that a rise or fall in interest rates will not materially
effect earnings.
Interest Rate Sensitivity Analysis
Over 1 to 5 Over 5
1 Day 90 Days 180 Days 365 Days Years Years
Rate Sensitive Assets (RSA)
Federal Funds Sold 11,375 0 0 0 0 0
Investment Securities 0 11,119 6,305 17,099 81,237 7,547
Loans(net of non
-accruals $24) 62,738 16,960 8,606 15,217 82,573 36,708
Total, RSA 74,113 28,079 14,911 32,316 163,810 44,255
Rate Sensitive
Liabilities (RSL)
Deposits:
Certificates of
Deposit of 0 20,196 10,235 15,754 10,120 0
$100,000 or more
All Other Time
Deposits 0 39,210 30,857 21,805 6,217 2,076
Money Market
Deposit Accounts 15,278 0 0 0 0 0
Securities Sold
Under Repurchase 27,003 13 0 3,300 2,050 0
Agreements
Total, RSL 42,281 59,419 41,092 40,859 18,387 2,076
RSA-RSL 31,832 (31,340) (26,181) (8,543) 145,423 42,179
Cumulative RSA-RSL 31,832 492 (25,689) (34,232) 111,191 153,370
Cumulative RSA/RSL 1.75 1.01 .82 .81 1.55 1.75
28
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 during the ongoing in-house problem
loan identification process. The Company includes the provisions of
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", in
the allowance for loan losses (see NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES). The provision for possible loan losses was
$800 in 1997, $360 in 1996 and $110 in 1995. Net loan charge-offs
totalled $291 in 1997, $232 in 1996, and $88 in 1995 with net
charge-offs being centered in consumer purpose loans during each
period. The reserve for possible loan losses as a percentage of net
loans was 1.32% at December 31, 1997, 1.30% at December 31, 1996,
and 1.49% at December 31, 1995.
Securities Transactions - Net unrealized gains/(losses) in the
investment securities portfolio were $983 at December 31, 1997, $202
at December 31, 1996, and $1,546 at December 31, 1995. The market
value of investment securities rose in 1995 as rates retreated,
declined modestly in 1996 as market rates rose somewhat, and rose
again in 1997 as rates declined. Security gains/(losses) of $(28),
$41, and $25 were taken in 1997, 1996, and 1995, respectively, when
bonds were sold to provide additional primary liquidity and to
manage the bank's interest rate sensitivity position.
Other Income - Other income, net of security sales, increased by
1.5% from $2,929 in 1995 to $2,974 in 1996 and grew 15.7% from
$2,974 in 1996 to $3,441 in 1997. Other income rose in 1996 due to
higher volumes in deposit and loan account activity and rose
significantly in 1997 due to continued growth in these areas
compounded by a June 1, 1997 increase in overall service charge
rates.
Other Expenses - Other expenses increased by 6.1% from $9,797
in 1995 to $10,393 in 1996 and 6.2% from $10,393 in 1996 to $11,041
in 1997. The components of other expenses are salaries and employee
benefits of $5,695, $6,166, and $6,591; occupancy and furniture and
equipment expenses of $1,504, $1,759, and $1,698; and other
operating expenses of $2,598, $2,468, and $2,752 for 1995, 1996, and
1997, respectively. The increase in salaries and employee benefits
reflects compensation increments, the increased costs of providing
employee benefits, and an increase from 177 to 182 full-time
equivalent employees over the three-year period. The addition of
the Myrtle Beach office impacted 1996 occupancy and furniture and
equipment expense as this was the first full year of operation.
During the third quarter of 1995, the Federal Deposit Insurance
Corporation (FDIC) announced that the bank insurance fund was fully
capitalized and banks were due a rebate of excessive paid-in
insurance premiums. The Conway National Bank received a $145 FDIC
insurance premium rebate and has experienced significantly lower
premiums in 1996 and 1997. Looking ahead, non-interest expense
should grow due to the addition of an office to the bank's branch
network during the third quarter of 1998 and the expenditure of
approximately $175 related to "Year 2000" costs (see Year 2000).
Income Taxes - Provisions for income taxes increased 17.9% from
$1,777 in 1995 to $2,095 in 1996 and 31.7% from $2,095 in 1996 to
$2,760 in 1997. The increase in income taxes is primarily due to an
increase in income before income taxes of 11.7% from $5,533 in 1995
to $6,179 in 1996 and 22.5% from $6,179 in 1996 to $7,567 in 1997.
Also, the utilization of tax-free income as a percentage of income
before income taxes declined in 1996 and 1997.
29
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. The Company
has cash balances on hand of $3,480, $3,078, and $2,927 at December
31, 1997, 1996, and 1995 with liabilities, consisting of cash
dividends payable, totalling $1,794, $1,435, and $1,432,
respectively. Management feels that liquidity sources are more than
adequate to meet funding needs.
CAPITAL RESOURCES
Total stockholders' equity was $37,717, $34,496, and $32,195 at
December 31, 1997, 1996, and 1995, representing 9.90%, 10.09%, and
9.92% of total assets, respectively. At December 31, 1997, the
Bank exceeds quantitative measures established by regulation to
ensure capital adequacy (see NOTE 15 - 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 INFLATION
Inflation normally has the effect of accelerating the growth
of both a bank's assets and liabilities. One result of this
inflationary effect is an increased need for equity capital.
Income is also affected by inflation. While interest rates have
traditionally moved with inflation, the effect on net income is
diminished because both interest earned on assets and interest paid
on liabilities vary directly with each other. In some cases,
however, rate increases are delayed on fixed-rate instruments.
Loan demand normally declines during periods of high inflation.
Inflation has a direct impact on the Bank's non-interest expense.
The Bank responds to inflation changes through readjusting
non-interest income by repricing services.
EFFECTS OF REGULATORY ACTION
The Federal Deposit Insurance Corporation (FDIC) reduced FDIC
insurance premium rates during the third quarter of 1995. This
decrease had a positive effect on earnings in 1995, 1996, and 1997,
and should favorably impact future years income. (see NET INCOME -
Other Expenses). 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
In an effort to simplify the current standards in the United States
for computing earnings per share ("EPS") and make them more
compatible with international standards, the FASB issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" in February 1997. SFAS 128 applies to entities with publicly
traded common stock or potential common stock and is effective for
financial statements for periods ending after December 15, 1997,
including interim periods. SFAS 128 simplifies the standards for
computing EPS previously found in APB Opinion 15, "Earnings per
Share." It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
companies with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. The Company does not have any dilutive common stock or
equivalents and accordingly the adoption of SFAS had no effect on
earnings per share computations.
The FASB also issued 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.
30
ACCOUNTING ISSUES (continued)
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 provided 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 of 1996 the FASB issued an exposure draft of a proposed
statement, "Accounting for Derivatives and Similar Financial
Instruments and for Hedging Activities." In August 1997 the FASB
distributed a draft of the standards section of the final statement,
together with related implementation guidance and examples to
members of the Financial Instruments Task Force and other identified
parties for comment on the draft's clarity and operationality. Under
the proposed standard, all derivatives would be measured at fair
value and recognized in the statement of financial position as
assets or liabilities. Although the final standard has not been
issued, the FASB has expressed publicly that a final statement would
be effective for fiscal years beginning after December 15, 1998.
Because the Company has limited use of derivative transactions at
this time, management does not expect that this standard, if adopted
in its present proposed form, would have a significant effect on the
Company.
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 have been identified and prioritized
with a time line established for projected dates of upgrades,
replacement, certification, and testing. 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 $175,000.
31
ITEM 8 - FINANCIAL STATEMENTS
CNB CORPORATION AND SUBSIDIARY
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
-32-
CNB CORPORATION AND SUBSIDIARY
CONWAY, SOUTH CAROLINA
CONTENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 34
FINANCIAL STATEMENTS
Consolidated balance sheets 35
Consolidated statements of income 36
Consolidated statements of changes in stockholders' equity 37
Consolidated statements of cash flows 38
NOTES TO FINANCIAL STATEMENTS 39-53
-33-
Elliott, Davis & Company, LLP
Certified Public Accountants
Members of the American Institute of Certified Public Accountants
Greenville, SC
Greenwood, SC
Anderson, SC
Aiken, SC
Columbia, SC
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Directors and Stockholders
CNB Corporation
Conway, South Carolina
We have audited the accompanying consolidated balance sheets of CNB
Corporation and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CNB
Corporation and Subsidiary at December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Elliott, Davis & Company, LLP
January 23, 1998
Internationally - Moore Stephens Elliott Davis, LLC
870 S Pleasantburg Drive P.O. Box 6286 Greenville, SC 29606-6286
Telephone (864) 242-3370 Telefax (864) 232-7161
-34-
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(amounts, except share data, in thousands)
DECEMBER 31,
1997 1996
ASSETS
CASH AND DUE FROM BANKS $ 14,371 $ 14,350
FEDERAL FUNDS SOLD 11,375 -
INVESTMENT SECURITIES HELD TO MATURITY
(fair value $70,893 in 1997 and
$70,306 in 1996) 70,239 70,149
INVESTMENT SECURITIES AVAILABLE FOR SALE 53,184 62,138
LOANS 222,826 185,933
Less unearned income (1,105) (1,058)
Less allowance for loan losses (2,879) (2,370)
Net loans 218,842 182,505
PREMISES AND EQUIPMENT 6,798 6,866
ACCRUED INTEREST RECEIVABLE 3,680 3,325
OTHER ASSETS 2,655 2,485
$381,144 $341,818
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing $ 55,422 $ 49,911
Interest-bearing 245,905 218,502
Total deposits 301,327 268,413
Securities sold under repurchase agreements 32,366 29,018
Federal Funds purchased - 4,000
United States Treasury demand notes 5,000 2,319
Other liabilities 4,707 3,547
Minority interest in consolidated subsidiary 27 25
Total liabilities 343,427 307,322
COMMITMENTS AND CONTINGENT LIABILITIES -
Notes 10, 11 and 12
STOCKHOLDERS' EQUITY
Common stock - $10 par value; authorized
1,500,000 shares in 1997 and 500,000 shares
in 1996; issued 598,681 shares in 1997 and
479,093 shares in 1996 5,987 4,791
Capital in excess of par value of stock 24,552 15,697
Retained earnings 7,030 14,082
Net unrealized holding gain on investment
securities available for sale, net of income
taxes 197 27
37,766 34,597
Less 539 shares and 1,075 shares held in
Treasury at cost (49) (101)
Total stockholders' equity 37,717 34,496
$381,144 $341,818
The accompanying notes are an integral part of these consolidated financial
statements.
-35-
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(amounts, except per share data, in thousands)
For the years ended
December 31,
1997 1996 1995
INTEREST INCOME
Loans and fees on loans $ 19,110 $ 15,808 $ 14,070
Investment securities
Taxable 7,191 7,488 6,762
Nontaxable 715 740 887
Total interest on investment
securities 7,906 8,228 7,649
Federal funds sold 743 460 882
Total interest income 27,759 24,496 22,601
INTEREST EXPENSE
Deposits 10,009 8,610 8,032
Securities sold under repurchase
agreements 1,676 1,906 2,002
United States Treasury demand notes 79 63 81
Total interest expense 11,764 10,579 10,115
Net interest income 15,995 13,917 12,486
PROVISION FOR LOAN LOSSES 800 360 110
Net interest income after
provision
for loan losses 15,195 13,557 12,376
NONINTEREST INCOME
Service charges on deposit accounts 2,246 1,956 1,795
Other service and exchange charges 1,195 1,018 1,134
Gain (loss) on sale of investment
securities available for sale (28) 41 25
Total noninterest income 3,413 3,015 2,954
NONINTEREST EXPENSES
Salaries and wages 5,328 5,031 4,552
Pensions and other employee benefits 1,263 1,135 1,143
Occupancy 670 719 550
Furniture and equipment 1,028 1,040 954
Liability insurance 105 79 310
Office supplies 366 290 304
Credit card operations 624 569 528
Other operating expenses 1,653 1,527 1,453
Minority interest in income of subsidiary 4 3 3
Total noninterest expenses 11,041 10,393 9,797
Income before provision for
income taxes 7,567 6,179 5,533
PROVISION FOR INCOME TAXES 2,760 2,095 1,777
Net income $ 4,807 $ 4,084 $ 3,756
NET INCOME PER SHARE OF COMMON STOCK $ 8.03 $ 6.84 $ 6.29
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
(amounts, except share data, in thousands)
Net unrealized
holding gain
Capital in (loss) on
excess of securities Total
Common par value Retained Treasury available stockholders'
Shares stock of stock earnings stock for sale equity
BALANCE, DECEMBER 31, 1994 479,093 $ 4,791 $ 15,659 $ 9,107 $ (112) $ (588) $ 28,857
1995
Net income - - - 3,756 - - 3,756
Cash dividend, $3.00 per share - - - (1,432) - - (1,432)
Treasury stock transactions (net) - - - - (21) - (21)
Gain on sale of treasury stock - - 17 - - - 17
Net change in unrealized holding
loss, net of income taxes of $678 - - - - - 1,018 1,018
BALANCE, DECEMBER 31, 1995 479,093 4,791 15,676 11,431 (133) 430 32,195
1996
Net income - - - 4,084 - - 4,084
Cash dividend, $3.00 per share - - - (1,433) - - (1,433)
Treasury stock transactions (net) - - - - 32 - 32
Gain on sale of treasury stock - - 21 - - - 21
Net change in unrealized holding
gain, net of income taxes of $269 - - - - - (403) (403)
BALANCE, DECEMBER 31, 1996 479,079 4,791 15,697 14,082 (101) 27 34,496
1997
Net income - - - 4,807 - - 4,807
Cash dividend, $3.00 per share - - - (1,794) - - (1,794)
Stock dividend 119,588 1,196 8,850 (10,046) - - -
Cash in lieu of fractional shares on
stock dividend - - - (19) - - (19)
Treasury stock transactions (net) - - - - 52 - 52
Gain on sale of treasury stock - - 5 - - - 5
Net change in unrealized holding
gain, net of income taxes of $132 - - - - - 170 170
BALANCE, DECEMBER 31, 1997 598,681 $ 5,987 $ 24,552 $ 7,030 $ (49) $ 197 $ 37,717
The accompanying notes are an integral part of these consolidated financial
statements.
-37-
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
For the years ended December 31,
1997 1996 1995
OPERATING ACTIVITIES
Net income $ 4,807 $ 4,084 $ 3,756
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 700 757 666
Provision for loan losses 800 360 110
Provision for deferred income taxes 10 89 134
Loss on sale of premises and equipment 51 - -
Changes in assets and liabilities:
Increase in accrued interest receivable (355) (38) (367)
Increase in other assets (170) (79) (65)
Increase in other liabilities 1,036 106 9
Increase in minority interest in subsidiary 2 2 3
Net cash provided by operating activities 6,881 5,281 4,246
INVESTING ACTIVITIES
Proceeds from sale of investment
securities available for sale 4,707 3,932 4,973
Proceeds from maturities of investment
securities held to maturity 17,776 19,670 3,474
Proceeds from maturities of investment
securities available for sale 18,832 11,546 9,755
Purchases of investment securities
available for sale (14,301) (15,921) (20,198)
Purchases of investment securities held
to maturity (17,866) (13,418) (8,346)
Net (increase) decrease in federal
funds sold (11,375) 7,300 (4,175)
Net increase in loans (37,137) (32,702) (8,129)
Premises and equipment expenditures (683) (457) (2,522)
Net cash used for investing activities (40,047) (20,050) (25,168)
FINANCING ACTIVITIES
Dividends paid (1,794) (1,432) (955)
Net increase in deposits 32,914 17,257 16,963
Increase (decrease) in securities sold
under repurchase agreements 3,348 (7,917) 7,699
Increase (decrease) in federal
funds purchased (4,000) 4,000 -
Increase (decrease) in United States
Treasury demand notes 2,681 1,553 (1,728)
Treasury stock transactions (net) 57 53 (4)
Cash in lieu of fractional shares on stock dividend (19) - -
Net cash provided by financing activities 33,187 13,514 21,975
Net increase (decrease) in cash and due from banks 21 (1,255) 1,053
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 14,350 15,605 14,552
CASH AND DUE FROM BANKS, END OF YEAR $ 14,371 $ 14,350 $ 15,605
CASH PAID FOR
Interest $ 11,233 $ 10,580 $ 9,772
Income taxes $ 2,665 $ 1,915 $ 1,727
The accompanying notes are an integral part of these consolidated financial
statements.
-38-
CNB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Principles of consolidation and nature of operations
The consolidated financial statements include the accounts of CNB Corporation
("the Company") and its majority-owned subsidiary, The Conway National Bank
("the Bank"). All significant intercompany balances and transactions have
been eliminated. The Bank operates under a national bank charter and provides
full banking services to customers. The Bank is subject to regulation of the
Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. The Company is subject to regulation of the Federal Reserve Board.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the dates of the consolidated balance
sheets and the consolidated statements of income for the periods covered.
Actual results could differ from those estimates.
Concentrations of credit risk
The Company, through its subsidiary, makes commercial and personal loans to
individuals and small businesses located primarily in the South Carolina
coastal region. The Company has a diversified loan portfolio and the borrowers'
ability to repay their loans is not dependent upon any specific economic
sector.
Cash and cash equivalents
For purposes of the statements of cash flows, cash and cash equivalents are
defined as those amounts included in the balance sheet caption "Cash and Due
from Banks". Cash and cash equivalents have an original maturity of three
months or less.
Investment securities
The Company accounts for investment securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires that the
Company classify debt securities upon purchase as available for sale, held to
maturity or trading. Such assets classified as available for sale are carried
at fair value. Unrealized holding gains or losses are reported as a component
of stockholders' equity net of deferred income taxes. Securities classified as
held to maturity are carried at cost, adjusted for the amortization of
premiums and the accretion of discounts. To qualify as held to maturity the
Company must have the intent and ability to hold the securities to maturity.
Trading securities are carried at market value. The Company has no trading
securities. Gains or losses on disposition of securities are based on the
difference between the net proceeds and the adjusted carrying amount of the
securities sold, using the specific identification method.
Loans and interest income
Interest on loans is accrued and taken into income based upon the interest
method. Interest on certain installment loans is accrued and taken into
income based upon the sum-of-the-months-digits method. The results from the
use of the sum-of-the-months-digits method are not materially different from
those that would be obtained using the interest method.
-39-
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Loans and interest income, continued
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all creditors value loans at the loan's fair value if it is probable that
the creditor will be unable to collect all amounts due according to the terms of
the loan agreement. Fair value may be determined based upon the present value
of expected cash flows, market price of the loan, if available, or value of the
underlying collateral. Expected cash flows are required to be discounted at
the loan's effective interest rate. SFAS No. 114 was amended by SFAS No. 118
to allow a creditor to use existing methods for recognizing interest income on
an impaired loan and by requiring additional disclosures about how a creditor
recognizes interest income on an impaired loan.
Under SFAS No. 114, as amended by SFAS 118, when the ultimate collectibility of
an impaired loan's principal is in doubt, wholly or partially, all cash receipts
are applied to principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to principal
then to interest income. Once the reported principal balance has been reduced
to zero, future cash receipts are applied to interest income, to the extent that
any interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled debt
restructuring. For these accruing impaired loans, cash receipts are typically
applied to principal and interest receivable in accordance with the terms of the
restructured loan agreement. Interest income is recognized on these loans
using the accrual method of accounting. As of December 31, 1997 and 1996, the
Company had no impaired loans.
Allowance for loan losses
The allowance for loan losses is based on management's ongoing evaluation of the
loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, the composition of
the loan portfolio, and management's estimate of anticipated credit losses.
Loans are charged against the allowance at such time as they are determined to
be losses. Subsequent recoveries are credited to the allowance. Management
considers the year-end allowance appropriate and adequate to cover possible
losses in the loan portfolio; however, management's judgment is based upon a
number of assumptions about future events, which are believed to be reasonable,
but which may or may not prove valid. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the allowance for loan losses will not be required.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
useful lives of the assets using primarily accelerated methods. Additions to
premises and equipment and major replacements or improvements are capitalized
at cost. Maintenance, repairs and minor replacements are expensed when
incurred. Gains and losses on routine dispositions are reflected in current
operations.
Non-performing assets
Non-performing assets include real estate acquired through foreclosure or deed
taken in lieu of foreclosure, and loans on non-accrual status. Loans are
placed on non-accrual status when, in the opinion of management, the collection
of additional interest is questionable. Thereafter no interest is taken into
income unless received in cash or until such time as the borrower demonstrates
the ability to pay principal and interest.
-40-
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Advertising expense
Advertising, promotional and other business development costs are generally
expensed as incurred. External costs incurred in producing media advertising
are expensed the first time the advertising takes place. External costs
relating to direct mailing costs are expensed in the period in which the direct
mailings are sent. Advertising, promotional and other business development
costs of $338,201, $293,711 and $349,805 were included in the Company's results
of operations for 1997, 1996 and 1995, respectively.
Income taxes
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for
Income Taxes". Under SFAS No, 109, deferred tax liabilities are recognized on
all taxable temporary differences (reversing differences where tax deductions
initially exceed financial statement expense, or income is reported for
financial statement purposes prior to being reported for tax purposes). In
addition, deferred tax assets are recognized on all deductible temporary
differences (reversing differences where financial statements expense initially
exceeds tax deductions, or income is reported for tax purposes prior to being
reported for financial statements purposes). Valuation allowances are
established to reduce deferred tax assets if it is determined to be "more likely
than not" that all or some portion of the potential deferred tax asset will
not be realized.
Net income per share
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings Per Share." Adoption of this standard in 1997 had no affect on net
income per share computations. Net income per share is computed on the basis
of the weighted average number of common shares outstanding, 598,435 in 1997,
596,870 in 1996, and 597,275 in 1995. The Company does not have any dilutive
instruments and therefore only basic net income per share is presented.
In September of 1997, the Company's Board of Directors declared a five-for-four
stock split effected in the form of a 25 percent common stock dividend. This
stock was issued on September 30, 1997, to common stockholders of record on
September 12, 1997. Share and per share data have been restated to reflect this
stock split.
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," as amended by SFAS No. 119, requires
disclosure of fair value information for financial instruments, whether or not
recognized in the balance sheet, when it is practicable to estimate the fair
value. SFAS No. 107 defines a financial instrument as cash, evidence of an
ownership interest in an entity or contractual obligations which require the
exchange of cash or other financial instruments. Certain items are specifically
excluded from the disclosure requirements, including the Company's common stock.
In addition, other nonfinancial instruments such as premises and equipment and
other assets and liabilities are not subject to the disclosure requirements.
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed herein:
Cash and due from banks - The carrying amounts of cash and due from banks (cash
on hand, due from banks and interest bearing deposits with other banks)
approximate their fair value.
Federal funds sold - The carrying amounts of federal funds sold approximate
their fair value.
-41-
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Investment securities held to maturity and available for sale - Fair values for
investment securities are based on quoted market prices.
Loans - For variable rate loans that reprice frequently and for loans that
mature within one year, fair values are based on carrying values. Fair values
for all other loans are estimated using discounted cash flow analyses, with
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Deposits - The fair values disclosed for demand deposits are, by definition,
equal to their carrying amounts. The carrying amounts of variable rate,
fixed-term money market accounts and short-term certificates of deposit
approximate their fair values at the reporting date. Fair values for
long-term fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities.
Short-term borrowings - The carrying amounts of borrowings under repurchase
agreements, federal funds purchased and U. S. Treasury demand notes
approximate their fair values.
Off-balance sheet instruments - Fair values of off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
Recently issued accounting standards
Accounting standards that have been proposed or issued by standard-setting
groups that do not require adoption until a future date will have no material
impact on the financial statements upon adoption.
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 amounts of these
reserve balances for the years ended December 31, 1997 and 1996 were
approximately $5,909,000 and $5,112,000, respectively.
-42-
NOTE 3 - INVESTMENT SECURITIES
The book value and approximate fair value of investment securities are
summarized as follows (amounts in thousands):
December 31, 1997
Amortized Unrealized Holding Fair
AVAILABLE FOR SALE cost Gains Losses value
United States Treasury
Within one year $ 10,252 $ 52 $ 8 $ 10,296
One to five years 11,987 125 - 12,112
22,239 177 8 22,408
Federal agencies
Within one year 4,995 1 12 4,984
One to five years 23,805 158 18 23,945
Six to ten years 1,375 21 - 1,396
30,175 180 30 30,325
State, county and municipal
One to five years 325 10 - 335
Other - restricted
Federal Reserve Bank stock 116 - - 116
Total available for sale $ 52,855 $ 367 $ 38 $ 53,184
HELD TO MATURITY
United States Treasury
Within one year $ 17,703 $ 11 $ 49 $ 17,665
One to five years 9,977 131 - 10,108
27,680 142 49 27,773
Federal agencies
One to five years 28,235 216 45 28,406
State, county and municipal
Within one year 1,540 9 - 1,549
One to five years 6,436 214 1 6,649
Six to ten years 5,746 157 - 5,903
After ten years 602 11 - 613
14,324 391 1 14,714
Total held to maturity $ 70,239 $ 749 $ 95 $ 70,893
December 31, 1996
AVAILABLE FOR SALE
United States Treasury
Within one year $ 15,533 $ 52 $ 22 $ 15,563
One to five years 16,262 169 27 16,404
31,795 221 49 31,967
Federal agencies
One to five years 29,072 48 169 28,951
After ten years 784 - 18 766
29,856 48 187 29,717
State, county and municipal
One to five years 326 12 - 338
Other - restricted
Federal Reserve Bank stock 116 - - 116
Total available for sale $ 62,093 $ 281 $ 236 $ 62,138
-43-
(Continued)
NOTE 3 - INVESTMENT SECURITIES, Continued
December 31, 1996
Amortized Unrealized Holding Fair
cost Gains Losses value
HELD TO MATURITY
United States Treasury
Within one year $ 17,066 $ 20 $ 30 $ 17,056
One to five years 23,703 154 176 23,681
40,769 174 206 40,737
Federal agencies
One to five years 13,320 97 110 13,307
Six to ten years 2,002 - 35 1,967
15,322 97 145 15,274
State, county and municipal
Within one year 1,112 2 2 1,112
One to five years 6,950 302 15 7,237
Six to ten years 5,626 20 75 5,571
After ten years 370 5 - 375
14,058 329 92 14,295
Total held to maturity $ 70,149 $ 600 $ 443 $ 70,306
Investment securities with an aggregate par value of $69,965,000 at December
31, 1997 and $55,665,000 at December 31, 1996 were pledged to secure public
deposits and for other purposes.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Following is a summary of loans by major classification (tabular amounts in
thousands):
December 31,
1997 1996
Real estate - mortgage $ 136,441 $ 111,474
Real estate - construction 19,653 15,148
Commercial and industrial 34,606 28,105
Loans to individuals for household, family and
other consumer expenditures 30,772 29,642
Agriculture 1,214 1,328
All other loans, including overdrafts 140 236
$ 222,826 $ 185,933
The Company's loan portfolio consisted of $160,088,000 and $129,833,000 in fixed
rate loans as of December 31, 1997 and 1996, respectively. At December 31,
1997, fixed rate loans with maturities in excess of one year amounted to
$119,281,000.
-44-
(Continued)
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, Continued
Changes in the allowance for loan losses are summarized as follows (tabular
amounts in thousands):
1997 1996 1995
Balance, beginning of year $ 2,370 $ 2,242 $ 2,220
Recoveries of loans previously charged
against the allowance 351 197 361
Provided from current year's income 800 360 110
Loans charged against the allowance (642) (429) (449)
Balance, end of year $ 2,879 $ 2,370 $ 2,242
At December 31, 1997 and 1996, non-accrual loans totaled $24,000 and $377,000,
respectively. The total amount of interest earned on non-accrual loans was
$1,000 in 1997, $7,000 in 1996, and $2,000 in 1995. The gross interest income
which would have been recorded under the original terms of the non-accrual loans
amounted to $3,000 in 1997, $45,000 in 1996, and $60,000 in 1995. As of
December 31, 1997 and 1996, the Company had no impaired loans.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 is summarized as follows (tabular amounts
in thousands):
1997 1996
Land and buildings $ 8,853 $ 8,358
Furniture, fixtures and equipment 5,313 5,404
14,166 13,762
Less accumulated depreciation and amortization 7,370 6,941
6,796 6,821
Construction in progress 2 45
$ 6,798 $ 6,866
Depreciation and amortization of bank premises and equipment charged to
operating expense totaled $700,000 in 1997, $757,000 in 1996, and $666,000 in
1995.
NOTE 6 - DEPOSITS
At December 31, 1997 and 1996, certificates of deposit of $100,000 or more
totaled $56,305,000 and $34,318,000, respectively. Interest expense on these
deposits was $2,815,000 in 1997, $1,639,000 in 1996, and $1,182,000 in 1995.
-45-
(Continued)
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are summarized as follows (amounts
in thousands):
December 31,
1997 1996
U. S. Government securities with a book value of $38,984
($39,242 fair value) and $42,181 ($42,174 fair value)
at December 31, 1997 and 1996, respectively, are used as
collateral for the agreements. $ 32,366 $ 29,018
The Bank enters into sales of securities under agreements to repurchase. These
obligations to repurchase securities sold are reflected as liabilities in the
consolidated balance sheets. The dollar amount of securities underlying the
agreements are book entry securities maintained at the Federal Reserve Bank of
Richmond. The weighted-average interest rate of these agreements was 4.61
and 4.71 percent at December 31, 1997 and 1996, respectively. Securities sold
under repurchase agreements averaged $35,815,000 and $39,440,000 during 1997 and
1996, respectively. The maximum amounts outstanding at any month-end were
$49,506,000 and $45,333,000 during 1997 and 1996, respectively.
NOTE 8 - LINES OF CREDIT
At December 31, 1997, the Bank had unused short-term lines of credit totaling
$17,000,000 to purchase Federal Funds from unrelated banks. 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 Company has a demand note through the U.S. Treasury, Tax and Loan system
with the Federal Reserve Bank of Richmond. The Company may borrow up to
$5,000,000 under the arrangement at an interest rate of 5.41%. The note is
secured by U.S. Treasury Notes with a market value of $6,066,000 at December 31,
1997. The amount outstanding under the note totaled $5,000,000 and $2,319,000
at December 31, 1997 and 1996, respectively.
NOTE 9 - INCOME TAXES
The provision for income taxes is reconciled to the amount of income tax
computed at the federal statutory rate on income before income taxes as
follows (amounts in thousands):
1997 1996 1995
Amount % Amount % Amount %
Tax expense at statutory rate $ 2,573 34.0% $ 2,101 34.0% $ 1,881 34.0%
Increase (decrease) in taxes resulting from:
Tax exempt interest (219) (2.9) (253) (4.1) (293) (5.3)
State bank tax (net of federal benefit) 132 1.8 121 2.0 115 2.1
Other - net 274 3.6 126 2.0 74 1.3
Tax provision $ 2,760 36.5% $ 2,095 33.9% $ 1,777 32.1%
-46-
(Continued)
NOTE 9 - INCOME TAXES, Continued
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
are as follows:
December 31,
1997 1996
Deferred tax assets:
Allowance for loan losses deferred for tax purposes $ 979 $ 806
Other 28 16
Gross deferred tax assets 1,007 822
Less valuation allowance 1,007 (799)
Net deferred tax assets - 23
Deferred tax liabilities:
Unrealized net gains on securities available for sale (132) (18)
Accumulated discount accretion (125) (150)
Depreciation for income tax reporting in excess of
amount for financial reporting (330) (349)
Other (31) -
Gross deferred tax liabilities (618) (517)
Net deferred tax liability $ (618) $ (494)
A portion of the change in the net deferred tax liability relates to the change
in unrealized net gains on securities available for sale. The related 1997
deferred tax provision of $114,000 has been recorded directly to stockholders'
equity. The balance of the change in the net deferred tax liability results
from the current period deferred tax expense.
The following summary of the provision for income taxes includes tax deferrals
which arise from temporary differences in the recognition of certain items of
revenue and expense for tax and financial reporting purposes (amounts in
thousands):
1997 1996 1995
Income taxes currently payable
Federal $ 2,487 $ 1,828 $ 1,484
State 223 178 159
2,710 2,006 1,643
Tax consequences of differences
Loan losses (173) (43) (7)
Depreciation (15) 39 80
Change of accounting method - - (13)
Accretion on investments 22 20 63
Other 216 73 11
Provision $ 2,760 $ 2,095 $ 1,777
-47-
(Continued)
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statements of
financial position. The contract amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The contract value of the Company's off-balance-sheet financial instruments is
as follows as of December 31, 1997
(amounts in thousands):
Contract
amount
Commitments to extend credit $ 20,551
Standby letters of credit $ 1,438
Commitments to extend credit are agreements to lend as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the Bank upon extension of credit is based on management's credit evaluation.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Bank was obligated under a number of non-cancelable
operating leases on land used for branch offices that had initial or remaining
terms of more than one year. Future minimum rental payments under these leases
at December 31, 1997 were (tabular amounts in thousands):
Payable in year ending Amount
1998 $ 56
1999 57
2000 58
2001 6
2002 and thereafter 25
Total future minimum payments required $ 202
Lease payments under all operating leases charged to expense totaled $62,000 in
1997, $61,000 in 1996, and $23,000 in 1995. The leases provide that the lessee
pay property taxes, insurance and maintenance cost.
The Company is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that
the liabilities, if any, arising from such litigation and claims will not be
material to the Bank's financial position.
-48-
NOTE 12 - RESTRICTION ON DIVIDENDS
The ability of the Company to pay cash dividends is dependent upon receiving
cash in the form of dividends from the Bank. Federal banking regulations
restrict the amount of dividends that can be paid and such dividends are
payable only from the retained earnings of the Bank. At December 31, 1997 the
Bank's retained earnings were $31,604,000.
NOTE 13 - TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND ASSOCIATES
Directors and executive officers of the Company and the Bank and associates of
such persons are customers of and had transactions with the Bank in the
ordinary course of business. Additional transactions may be expected to take
place in the future. Also, included in such transactions are outstanding loans
and commitments, all of which were made on comparable terms, including
interest rates and collateral, as those prevailing at the time for other
customers of the Bank, and did not involve more than normal risk of
collectibility or present other unfavorable features. Total loans to all
executive officers and directors, including immediate family and business
interests, at December 31, 1997 and 1996, were $1,628,000 and $1,895,000,
respectively. During 1997, $86,000 of new loans were made to this group and
repayments of $353,000 were received.
NOTE 14 - 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 years ended December 31, 1997, 1996 and
1995, $361,000, $336,000, and $266,000, respectively, were charged to
operations under the plan.
Supplemental benefits are provided to certain key officers under The Conway
National Bank Executive Supplemental Income Plan (ESI) and the Long-Term
Deferred Compensation Plan (LTDC). These plans are not qualified under the
Internal Revenue Code. The plans are unfunded. However, certain benefits under
the ESI Plan are informally and indirectly funded by insurance policies on the
lives of the covered employees.
NOTE 15 - 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are 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 Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
-49-
(Continued)
NOTE 15 - REGULATORY MATTERS, Continued
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the
institution's category. The Bank's actual capital amounts and ratios and
minimum regulatory amounts and ratios are presented as follows (dollar amounts
in thousands):
To be well capitalized
For capital under prompt corrective
adequacy purposes action provisions
Actual Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997
Total Capital (to risk
weighted assets) $ 38,295 16.98 % $ 18,046 8.0 % $ 22,558 10.0 %
Tier I Capital (to risk
weighted assets) 35,475 15.73 9,023 4.0 13,535 6.0
Tier I Capital (to average assets) 35,475 9.45 15,018 4.0 18,773 5.0
As of December 31, 1996
Total Capital (to risk
weighted assets) $ 34,932 18.47 % $ 15,132 8.0 % $ 18,915 10.0 %
Tier I Capital (to risk
weighted assets) 32,568 17.22 7,566 4.0 11,349 6.0
Tier I Capital (to average assets) 32,568 9.53 13,676 4.0 17,095 5.0
NOTE 16 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as follows
at December 31 (amounts in thousands):
1997 1996
Carrying Fair Carrying Fair
amount value amount value
FINANCIAL ASSETS
Cash and due from banks $ 14,371 $ 14,371 $ 14,350 $ 14,350
Federal funds sold 11,375 11,375 - -
Investment securities held to maturity 70,239 70,893 70,149 70,306
Investment securities available for sale 53,184 53,184 62,138 62,138
Loans 222,826 219,546 185,933 184,065
FINANCIAL LIABILITIES
Deposits 301,327 301,490 268,413 268,514
Securities sold under repurchase agreements 32,366 32,420 29,018 29,173
Federal funds purchased - - 4,000 4,000
U. S. Treasury demand notes 5,000 5,000 2,319 2,319
OFF-BALANCE-SHEET INSTRUMENTS
Commitments to extend credit 20,551 20,551 11,234 11,234
Standby letters of credit 1,438 1,438 906 906
-50-
NOTE 17 - PARENT COMPANY INFORMATION
Following is condensed financial information of CNB Corporation (parent company
only) (amounts in thousands):
CONDENSED BALANCE SHEETS
December 31,
1997 1996
ASSETS
Cash $ 3,480 $ 3,078
Investment in subsidiary 35,646 32,571
Land 348 245
Other assets 37 37
$ 39,511 $ 35,931
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 1,794 $ 1,435
Stockholders' equity (net of $49 and $101 of treasury stock) 37,717 34,496
$ 39,511 $ 35,931
CONDENSED STATEMENTS OF INCOME
For the years ended December 31,
1997 1996 1995
INCOME
Dividend from bank subsidiary $ 1,934 $ 1,548 $ 1,549
Other income - 11 2
1,934 1,559 1,551
EXPENSES
Sundry 34 30 22
Income before equity in undistributed
net income of bank subsidiary 1,900 1,529 1,529
EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARY 2,904 2,555 2,227
Net income $ 4,804 $ 4,084 $ 3,756
-51-
NOTE 17 - PARENT COMPANY INFORMATION, Continued
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1997 1996 1995
OPERATING ACTIVITIES
Net income $ 4,804 $ 4,084 $ 3,756
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in undistributed net income of bank subsidiary (2,904) (2,555) (2,227)
Net cash provided by operating activities 1,900 1,529 1,529
INVESTING ACTIVITIES
Purchase of land (103) - -
FINANCING ACTIVITIES
Dividends paid (1,435) (1,432) (955)
Cash in lieu of fractional shares on stock dividend (19) - -
Treasury stock transactions (net) 57 54 (5)
Net cash provided by (used for) financing activities (1,395) (1,378) (960)
Net increase in cash 402 151 569
CASH, BEGINNING OF YEAR 3,078 2,927 2,358
CASH, END OF YEAR $ 3,480 $ 3,078 $ 2,927
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited condensed financial data by quarter for 1997 and 1996 is as follows
(amounts, except per share data, in thousands):
Quarter ended
1997 March 31 June 30 Sept. 30 Dec. 31
Interest income $ 6,520 $ 6,813 $ 7,108 $ 7,318
Interest expense 2,798 2,923 3,022 3,021
Net interest income 3,722 3,890 4,086 4,297
Provision for loan losses 240 210 150 200
Net interest income after
provision for loan losses 3,482 3,680 3,936 4,097
Noninterest income 775 871 993 774
Noninterest expenses 2,541 2,687 2,621 3,192
Income before income taxes 1,716 1,864 2,308 1,679
Income taxes 603 712 805 640
Net income $ 1,113 $ 1,152 $ 1,503 $ 1,039
Net income per share $ 1.86 $ 1.92 $ 2.51 $ 1.74
Weighted average shares outstanding 598,198 598,401 598,486 598,435
-52-
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED), Continued
Quarter ended
1996 March 31 June 30 Sept. 30 Dec. 31
Interest income $ 5,841 $ 6,012 $ 6,196 $ 6,447
Interest expense 2,675 2,634 2,631 2,639
Net interest income 3,166 3,378 3,565 3,808
Provision for loan losses 50 90 90 130
Net interest income after
provision for loan losses 3,116 3,288 3,475 3,678
Noninterest income 742 740 846 687
Noninterest expenses 2,481 2,574 2,489 2,849
Income before income taxes 1,377 1,454 1,832 1,516
Income taxes 450 498 611 536
Net income $ 927 $ 956 $ 1,221 $ 980
Net income per share $ 1.55 $ 1.60 $ 2.05 $ 1.64
Weighted average shares outstanding 596,551 596,571 596,630 596,870
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-53-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE COMPANY
Directors
The Directors and Nominees for election to the Board of Directors of
the Company are as follows:
Proposed Present Company
Director Term Principal Stock Owned
Name (Age) Since Expires Occupation Number %
Willis J. Duncan
(70) 1958 2000 Chairman of the Board. 33,170(1) 5.55
The President of the
Bank from November
1985 to February 1988.
*W. Jennings Duncan
(42) 1984 2001 President. Executive 18,130(2) 3.03
Vice President of the
Bank from November
1985 to February 1988.
*Dr. R. C. Smith
(83) 1959 2001 Past Chairman of the 1,867 .31
Board. Chairman of the
Board from 1979 to
1985, when he became
Vice Chairman.
Chairman of the Board
from November 1985 to
February 1988.
Retired in 1985 as a
physician with Conway
Internists, P.A. of
Conway,South Carolina.
*James W. Barnette, Jr
(52) 1984 2001 President of Surfside 4,858(3) .81
Rent Mart, Inc., a
general rental company
located in Surfside
Beach, S.C., since
1992. Private real
estate investor from
1988 to 1991.
Previously, Mr.
Barnette was General
Manager of Coastal
Golf Corp., Burning
Ridge Corp., and
Indian Wells Golf
Club, which own and
operate golf courses
in the Myrtle Beach,
South Carolina, area.
54
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE COMPANY (continued)
Proposed Present Company
Director Term Principal Stock Owned
Name (Age) Since Expires Occupation Number %
Harold G. Cushman, Jr.
(68) 1963 1999 Retired in 1995 as 20,403(4) 3.41
President of Dargan
Construction Company,
Inc.
Charles C. Cutts 1945 1999 Retired. 18,123(5) 3.03
(92)
Paul R. Dusenbury 1997 2000 Treasurer. Vice 836(6) .14
(39) President and Cashier
of the Bank since 1988.
G. Heyward Goldfinch
(79) 1976 1999 Retired. Director 1,937 .32
of Goldfinch's, Inc.,
a funeral home, and of
Hillcrest Cemetery of
Conway, Incorporated.
John Monroe J. Holliday
(81) 1969 2000 President of Palmetto 15,234(7) 2.55
Farms Corp. and partner
in Holliday Associates,
diversified agricul-
tural, real estate
development, and retail
companies headquartered
in Horry County, South
Carolina.
Robert P. Hucks 1993 1999 Executive Vice 1,774(8) .30
(52) President. Served as
Vice President and
Cashier of the Bank
from 1985 to 1988.
Richard M. Lovelace,Jr.
(51) 1984 2000 Attorney in private 1,912(9) .32
practice with Lovelace
& Rogers, PA in Conway,
South Carolina.
*John K. Massey
(83) 1959 2001 Retired. 4,722(10) .79
Howard B. Smith, III
(49) 1993 1999 Asst. Professor of 2,393 .40
Accounting with Coastal
Carolina University
since January, 1998.
Previously, Mr. Smith
was a practicing
certified public
accountant with Smith,
Sapp,Bookhout,Crumpler,
& Callihan,P.A. in
Myrtle Beach, South
Carolina.
* Nominee for election to the Board of Directors.
55
Except as indicated below, each director or director nominee of the company
has sole voting and investment power with respect to all shares of Company
stock owned by such director or director nominee. The address of each
director or director nominee is c/o The Conway National Bank, Post Office
Drawer 320, 1400 Third Avenue, Conway, South Carolina 29526. All directors
and officers of the Company and its subsidiary, The Conway National Bank, as
a group (41 persons), own 148,550 (24.84%) shares of Company stock.
(1) Includes 10,517 shares held by Harriette B. Duncan (wife).
(2) Includes 669 shares held by Robin F. Duncan (wife); 2,308 shares held
by Ann Louise Duncan(daughter); 2,308 shares held by Mary Kathryn Duncan
(daughter); 2,308 shares by Willis Jennings Duncan, V (son); and 2,308
shares by Margaret Brunson Duncan (daughter).
(3) Includes 4,022 shares held by Janet J. Barnette (wife).
(4) Includes 17,500 shares held by the Cushman Family Limited partnership;
261 shares held by Dianne C. Cushman (wife); 941 shares held by Marion
Shannon Cushman (son); 485 shares held by Frances Faison Cushman (daughter);
485 shares held by Harold G. Cushman, III (son); 62 shares held by Harold G.
Cushman, IV (grandson); and 62 shares held by Kara Dawn Cushman
(granddaughter).
(5) Includes 9,611 shares held by Eugenia B. Cutts (wife).
(6) Includes 125 shares held by Jennifer S. Dusenbury (wife); 37 shares
held by Elena Cox Dusenbury (daughter); and 37 shares held by Sarah Cherry
Dusenbury (daughter).
(7) Includes 1,575 shares held by Marjorie R. Holliday Irrevocable Trust
(wife); 4,130 shares held by M. Russell Holliday, Jr. (daughter); 2,472
shares held by Christian M. Holliday Douglas (daughter); 432 shares held
by Christian M. H. Douglas, Jr. (granddaughter); 432 shares held by
Marjorie Russell Douglas (granddaughter); 432 shares held by David Duvall
Douglas, Jr. (grandson); and 605 shares held by David D. and Christian M.H.
Douglas Trust (grandchildren).
(8) Includes 250 shares held by Willie Ann Hucks (wife); 25 shares
held by Mariah J. Hucks (daughter); 62 shares held by Norah Leigh Hucks
(daughter); and 187 shares held by Robert P. Hucks, II (son).
(9) Includes 362 shares held by Rebecca S. Lovelace (wife); 235 shares
held by Richard Blake Lovelace (son); and 550 shares held by Macon B.
Lovelace (son).
(10) Includes 1,322 shares held by Bertha T. Massey (wife).
Each director of the Company has been engaged in his principal occupation
of employment as specified above for five (5) years or more unless otherwise
indicated.
W. Jennings Duncan is Willis J. Duncan's son. Richard M. Lovelace,
Jr. is Dr. R. C. Smith's son-in-law. No other family relationships exist
among the above named directors or officers of the Company. None of the
directors of the Company holds a directorship in any company with a
class of securities registered under Section 12 of the Securities Exchange Act
of 1934, as amended, or subject to the requirements of Section 15(d) of that
act or in any company registered as an investment company under the Investment
Company Act of 1940, as amended.
56
The Board of Directors of the Company, as originally constituted, was
classified into three (3) classes with each class consisting of five (5)
directors. Four (4) directors in Class I will be elected at the 1998 Annual
Meeting to serve for a three (3) year term. Directors in Class II will be
elected at the 1999 Annual Meeting to serve for a three (3) year term and
Directors in Class III will be elected at the 2000 Annual Meeting to serve for
a three (3) year term. Currently, there are thirteen (13) Directors, with four
(4) directors in Class I. The Board of Directors has passed a resolution fixing
the total number of Directors at thirteen (13).
The Board of Directors of the Company serves as the Board of Directors of
its subsidiary, The Conway National Bank. The Company's Board of Directors
meets as is necessary and the Bank's Board of Directors meets on a monthly
basis.
The Board of Directors of the Bank has an Executive Committee that meets
when necessary between scheduled meetings of the Board of Directors. The
Executive Committee recommends to the Board of Directors the appointment of
officers; determines officer compensation subject to Board approval; reviews
employee salaries; considers any director nominee submitted by the shareholders;
and addresses any other business as is necessary which does not come under the
authority of other committees on the Board of Directors. The Executive
Committee will consider any nominee to the Board of Directors submitted by the
shareholders, provided shareholders intending to nominate director candidates
for election deliver written notice thereof to the Secretary of the Company
not later than (i) with respect to at election to be held at an Annual Meeting
of shareholders, ninety (90) days prior to the anniversary date of the
immediately preceding Annual Meeting of shareholders, and (ii) with respect
to an election to be held at a special meeting of shareholders, the close of
business on the tenth (10th) day following the date on which notice of such
meeting is first given to shareholders. The Bylaws further provide that the
notice shall set forth certain information concerning such shareholder and
his nominee(s), including their names and addresses, a representation that the
shareholder is entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice, a description of all arrangements or understandings between the
shareholder and each nominee, such other information as would be required to
be included in a proxy statement soliciting proxies for the election of the
nominees of such shareholder and the consent of each nominee to serve as
Director of the Company if so elected. The Chairman of the meeting may refuse
to acknowledge the nomination of any person not made in compliance with the
foregoing procedures. The members of the Executive Committee are Charles C.
Cutts, Willis J. Duncan, W. Jennings Duncan, and Dr. R. C. Smith.
In addition, the Board of Directors of the Bank has Audit, Loan, Public
Relations, and Building Committees. The members of the Audit Committee are
Charles C. Cutts, Paul R. Dusenbury, John Monroe J. Holliday, John K. Massey,
Howard B. Smith, III, and Dr. R. C. Smith. The members of the Loan Committee
are James W. Barnette, Jr., Harold G. Cushman, Jr., Willis J. Duncan, W.
Jennings Duncan, G. Heyward Goldfinch, Robert P. Hucks, and Richard M.
Lovelace, Jr. The members of the Public Relations Committee are James W.
Barnette, Jr., G. Heyward Goldfinch, and John K. Massey. The members of the
Building Committee are James W. Barnette, Jr., Harold G. Cushman, Jr.,
Willis J. Duncan, W. Jennings Duncan, and Robert P. Hucks. Willis J. Duncan,
Chairman of the Board, and W. Jennings Duncan, President, are ex officio
members of each of these committees of the Board with the exception of the
Audit Committee.
57
The function of the Audit Committee is to ensure that adequate accounting
procedures are in existence and functioning in a manner adequate to safeguard
the assets of the Bank. The Audit Committee also monitors internal and external
audit activities. The function of the Loan Committee is to review and approve
new loans and monitor the performance and quality of existing loans, as well as
to ensure that sound policies and procedures exist in the Bank's lending
operations.
During 1997, the Company's Board of Directors met six (6) times; the
Bank's Board of Directors met twelve (12) times; the Executive Committee met ten
(10) times; the Audit Committee met nine (9) times; the Loan Committee met
twelve (12) times; the Building Committee met three (3) times; and the Public
Relations Committee did not meet. Each Director attended at least 75% of the
aggregate of (a) the total number of meetings of the Board of Directors held
during the period for which he served as Director and (b) the total number of
meetings held by all committees of the Board of Directors of which he served.
Executive Officers:
The Executive Officers and other officers of the Company are
as follows:
Position(s) Currently
Name Age With The Company
Willis J. Duncan 70 Chairman of the Board (1)
W. Jennings Duncan 42 President and Director (1)
Robert P. Hucks 52 Executive Vice President and
Director (1)
Verta Lee Chestnut 59 Secretary
Paul R. Dusenbury 39 Treasurer and Director (1)
(Chief Financial Officer and
Chief Accounting Officer)
_________________
(1) Executive Officer
All executive officers and other officers serve at the pleasure of
the Board of Directors of the Company. Each executive officer and other officer
of the Company has been an officer of the Company and/or the Bank for five (5)
years.
58
ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company pays no remuneration to its Directors and Executive Officers.
All remuneration for services rendered are paid by the Company's subsidiary,
The Conway National Bank, Conway, South Carolina ("the Bank").
Compensation Committee Report
The Executive Committee of the Bank recommends to the Board of Directors
the appointment of officers; determines officer compensation subject to Board
approval; and reviews employee salaries. The compensation of the President
(Chief Executive Officer) and the other executive officers is not tied directly
to corporate performance or any measure thereof. However, it would be deemed
unacceptable by the Executive Committee, Board, and management to establish
compensation levels that are not consistent with the performance of the Bank
or return to shareholders. During the compensation decision process, much
emphasis is placed on the Job Evaluation Salary Administration Program (JESAP)
Committee. The "JESAP" Committee is charged with the responsibility of
establishing job position descriptions; applying values to each job position in
the form of a salary range; and obtaining salary surveys of a local, regional,
and national level to determine that salary ranges are consistent with the
industry and peers. The "JESAP" committee utilizes an independent management
consulting firm to aid in this process. For each Bank employee, including the
President (Chief Executive Officer) and all executive officers, a salary
minimum, midpoint, and maximum is established. For fiscal 1997, all executive
officer salary levels were below the midpoint as established by the JESAP
process.
Summary Compensation Table
Annual Compensation Long-Term
Compensation
Awards Payouts
Stock Long-Term
Other Restricted Options Incentive
Name and ($) ($) Annual(1) Stock($) /SAR'S Payout All Other(2)
Principal Position Year Salary Bonus Compensation Awards (#) ($) Compensation
W. Jennings Duncan 1997 128,136 25,000 3,386 0 0 0 9,610
President and 1996 121,740 15,640 2,985 0 0 0 9,131
Director of Bank 1995 110,145 865 2,570 0 0 0 7,159
Robert P. Hucks 1997 113,280 22,188 6,000 0 0 0 8,496
Executive Vice 1996 107,628 13,960 6,000 0 0 0 8,072
President and 1995 98,010 865 750 0 0 0 6,371
Director of Bank
Paul R. Dusenbury 1997 105,024 20,688 6,000 0 0 0 7,877
Vice President and 1996 99,780 13,000 6,000 0 0 0 7,484
Cashier of Bank 1995 90,380 865 750 0 0 0 5,875
[FN]
(1) Cash value of personal use of automobile furnished by the Bank or
automobile travel allowance.
(2) Cash contributions made by the Bank to the Bank's contributory
profit-sharing and savings defined contribution plan.
</FN>
59
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS (continued)
PENSION PLAN DISCLOSURE
The Bank has a defined contribution pension plan covering all employees
who have attained age twenty-one and have a minimum 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 contributions of salary
deferred and fifty percent of employee contributions in excess of one percent
and up to six percent of salary deferred. For the years ended December 31,
1997, 1996, and 1995, $361,000, $336,000, and $266,000, respectively, was
charged to operations under the plan.
The Board of Directors of the Bank provides supplemental benefits to
certain key officers, including Willis J. Duncan, W. Jennings Duncan, Robert
P. Hucks, and Paul R. Dusenbury, under The Conway National Bank Executive
Supplemental Income (ESI) Plan and a Long-Term Deferred Compensation (LTDC)
Plan. These plans are not qualified under the Internal Revenue Code. These
plans are unfunded, however, certain benefits under the ESI Plan are informally
and indirectly funded by insurance policies on the lives of the covered
employees. Under the provisions of the ESI Plan, the Bank and the participating
employees will execute agreements providing each employee (or his beneficiary,
if applicable) with a pre-retirement death benefit and a post-retirement
annuity benefit. The ESI Plan is designed to provide participating employees
with a pre-retirement benefit based on a percentage of the employee's current
compensation. The ESI agreement's post-retirement benefit is designed to
supplement a participating employee's retirement benefits from Social Security
in order to provide the employee with a certain percentage of his final average
income at retirement age. While the employee is receiving benefits under the
ESI Agreement, the agreement will prohibit the employee from competing with the
Bank and will require the participating employee to be available for consulting
work for the Bank. The ESI Agreement may be amended or revoked at any time
prior to the participating employee's death or retirement, but only with the
mutual written consent of the covered employee and the Bank. The ESI Agreements
require that the participating employee be employed at the Bank at the earlier
of death or retirement to be eligible to receive, or have his beneficiary
receive, benefits under the agreement. During 1997, the Board approved a LTDC
Plan to be finalized in 1998. Under the LTDC Plan, certain key employees and
the Board of Directors may defer a portion of their compensation for their
retirement and purchase units which are equivalent in value to one share of the
Company's stock at market value. The employee or Director receives
appreciation, if any, in the market value of the unit as compared to the initial
value per unit.
Performance Graphs
The performance graph shall be submitted in paper form under cover of Form SE as
provided in Rule 304(d) of Regulation S-T.
60
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS (continued)
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
No Compensation Committee interlocks exist. The members of the Executive
Committee of the Board, which serves as the Compensation Committee, are Charles
C. Cutts (outside Director), Willis J. Duncan (Chairman of the Board and inside
Director), W. Jennings Duncan (President and inside Director), and Dr. R.C.
Smith (outside Director). Membership of the "JESAP" Committee consists of six
Bank officers.
Director Compensation
Directors who are not Bank officers received $300 for each monthly meeting
of the Board of Directors and an additional $100 for each committee meeting
attended in 1997. Effective February, 1998, Director compensation for monthly
Board meetings was increased to $400.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of
a registered class of the Company's equity securities to file reports of
ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities
and Exchange Commission (the "SEC") and the National Association of Securities
Dealers. Such officers, directors, and 10 percent shareholders are also
required by SEC rules to furnish the Company with copies of all Section 16(a)
forms that they file.
Based solely on its review of copies of such reports received or written
representations from certain reporting persons, the Company believes that
during the fiscal year ended December 31, 1997, all Section 16(a) filing
requirements applicable to its officers, directors, and 10 percent shareholders
were complied with.
61
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of December 31, 1997, certain
information regarding the ownership of Company Stock of all officers and
directors of the Company. No shareholder who is not an officer or director of
the Company is known to the management of the Company to be the beneficial
owner of more than five (5%) percent of the Company Stock. The Company
Stock is the Company's only class of voting securities.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership(1) of Class
Willis J. Duncan 33,170 5.6%
1400 Third Avenue
Conway, South Carolina 29526
All Officers and Directors as a Group
(41 persons) (2) 148,550 24.8%
_________________
(1) For a description of the amount and nature of ownership of the directors
of the Company, see "Management of the Company -Directors".
(2) Includes 27 officers of the subsidiary, The Conway National Bank, who
are not officers of the Company.
ITEM 13. CERTAIN TRANSACTIONS
Directors, principal shareholders, and Executive Officers of the Company
and the Bank are customers of and had transactions with the Bank in the ordinary
course of business. Included in such transactions are outstanding loans and
commitments, all of which were made on comparable terms, including interest
rates and collateral as those prevailing at the time for other customers of
the Bank, and did not involve more than normal risk of collectibility or
present other unfavorable features.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following exhibits, financial statements and financial
statement schedules are filed as part of this report:
FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Statements of Condition - December 31, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996,
and 1995
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted from this Annual Report
because the required information is presented in the financial statements or
in the notes thereto or the required subject matter is not applicable.
EXHIBITS
See Exhibit Index appearing below.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
EXHIBIT INDEX
Exhibit
Number
3 Articles of Incorporation - A copy of the Articles of
Incorporation of the Company is incorporated herein
by reference to Exhibit 3(a) which was filed with a
Form 10-Q Quarterly Report dated June 30, 1997
By-laws of the Company - A copy of the By-laws of the
Company is incorporated herein by reference to Exhibit
3(b) which was filed with a Form 10-Q Quarterly
Report dated June 30, 1997.
22 Subsidiaries of the Registrant - A copy of the subsidi-
aries of the registrant is incorporated herein by refer-
ence to Exhibit 22 which was filed with a Form 10-K
Annual Report dated March 28, 1986.
27 Financial Data Schedule - Article 9 Financial Data Schedule
for 10-k for electronic filers (pages 65 and 66).
All other exhibits, the filing of which are required with this Form,
are not applicable.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
In addition to the Form 10-K Annual Report and related exhibits, the
registrant has included the annual report to security holders covering
the registrant's last fiscal year and the proxy statement, form of proxy and
proxy soliciting material sent to the registrant's security holders with
respect to the annual meeting. Such material is not deemed to be "filed"
with the Commission or subject to the liabilities of Section 18 of the Act and
is not incorporated into the Form 10-K Annual Report by reference.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
W. Jennings Duncan, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in their capacities on March 20, 1998.
Signature Capacity
Willis J. Duncan Chairman of the Board
W. Jennings Duncan President and Director
Robert P. Hucks Executive Vice President and
Director
Verta Lee Chestnut Secretary
Paul R. Dusenbury Treasurer and Director
(Chief Financial Officer
and Chief Accounting Officer)
Dr. R. C. Smith Past Chairman of the Board
and Director
James W. Barnette, Jr. Director
Harold G. Cushman, Jr. Director
Charles C. Cutts Director
G. Heyward Goldfinch Director
Richard M. Lovelace, Jr. Director
John K. Massey Director
Howard B. Smith, III Director
64