FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
P.O. Box 320, Conway, South Carolina 29528
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (843) 248-5721
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's shares of common
equity as of the latest practical date: 788,419 shares of common stock, par
value $10 per share, July 31, 2005.
CNB Corporation
Page
Forward-Looking Statements ............................................... 1
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of June 30, 2005,
December 31, 2004 and June 30, 2004 .............................. 2
Consolidated Statement of Income for the Three Months
and Six Months Ended June 30, 2005 and 2004 ...................... 3
Consolidated Statement of Comprehensive Income
for the Three Months and Six Months Ended June 30, 2005 and 2004 . 4
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 2005 and 2004 ........... 5
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 2005 and 2004 ..................................... 6
Notes to Consolidated Financial Statements ....................... 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 15-24
Item 3. Qualitative and Quantitative Disclosures About Market Risk ....... 24
Item 4. Controls and Procedures .......................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ............. 25
Item 5. Other Information ............................................... 25
Item 6. Exhibits ........................................................ 25
SIGNATURE ................................................................ 26
Forward-Looking Statements
Statements included in this report which are not historical in nature are
intended to be, and are hereby identified as "forward-looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Company's expectations, beliefs, estimates and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including
without limitation, management's examination of historical operating trends,
data contained in the Company's records and other data available from third
parties, but there can be no assurance that management's expectations, beliefs,
estimates or projections will result or be achieved or accomplished.
The Company cautions readers that forward-looking statements, including
without limitation, those relating to the Company's recent and continuing
expansion, its future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, income, and adequacy of the allowance for loan
losses, are subject to risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward-looking statements, due
to several important factors herein identified, among others, and other risks
and factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
1
PART I.
Item 1. Financial Statements
CNB Corporation and Subsidiary
Consolidated Balance Sheets
(All Dollar Amounts, Except Per Share Data, in Thousands)
ASSETS: June 30, December 31, June 30,
2005 2004 2004
---- ---- ----
(Unaudited) (Unaudited)
Cash and due from banks ............................................... $ 31,047 $ 25,793 $ 24,100
Investment Securities ................................................. 4,300 4,519 5,440
(Fair values of $4,464 at June 30, 2005, $4,765 at
December 31, 2004, and $5,685 at June 30, 2004)
Securities Available for Sale ......................................... 192,445 209,994 189,133
(Amortized cost of $193,574 at June 30, 2005,
$208,771 at December 31, 2004, and $189,356 at
June 30, 2004)
Federal Funds sold and securities purchased under
agreement to resell ................................................. 16,000 - 31,000
Loans:
Total loans ........................................................ 451,732 406,983 390,303
Less allowance for possible loan losses ............................ (5,602) (5,104) (4,861)
--------- --------- ---------
Net loans ........................................................ 446,130 401,879 385,442
Bank premises and equipment ........................................... 17,972 17,628 17,894
Other assets .......................................................... 13,176 11,756 11,162
--------- --------- ---------
Total assets .............................................................. $ 721,070 $ 671,569 $ 664,171
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing ............................................... $ 134,034 $ 118,580 $ 123,449
Interest-bearing ................................................... 481,480 441,784 441,027
--------- --------- ---------
Total deposits .................................................. 615,514 560,364 564,476
--------- --------- ---------
Federal funds purchased and securities sold under
agreement to repurchase ......................................... 28,746 33,950 29,087
Other short-term borrowings ........................................... 1,234 2,895 1,652
Other liabilities ..................................................... 4,726 6,775 3,038
--------- --------- ---------
Total liabilities ........................................................ 650,220 603,984 598,253
--------- --------- ---------
Stockholders' equity:
Common stock, par value $10 per share: .............................. 7,898 7,898 7,182
Authorized 1,500,000 in 2005 and 2004; issued
789,774 at June 30, 2005, and at December 31, 2004,
and 718,246 at June 30, 2004
Surplus ............................................................ 43,543 43,543 34,815
Undivided Profits .................................................. 20,265 15,558 24,154
Net Unrealized Holding Gains (Losses) .............................. (678) 734 (133)
On Available-For-Sale Securities
Less: Treasury stock ............................................... (178) (148) (100)
--------- --------- ---------
Total stockholders' equity ............................................. 70,850 67,585 65,918
--------- --------- ---------
Total liabilities and stockholders' equity ................................ $ 721,070 $ 671,569 $ 664,171
========= ========= =========
2
CNB Corporation and Subsidiary
Consolidated Statement of Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Interest Income:
Interest and fees on loans ....................................... $ 7,349 $ 5,927 $ 14,152 $ 11,656
Interest on investment securities:
Taxable investment securities .................................. 1,643 1,618 3,332 3,234
Tax-exempt investment securities ............................... 226 240 456 485
Interest on federal funds sold and securities
purchased under agreement to resell ............................ 184 58 247 104
-------- -------- -------- --------
Total interest income ........................................ 9,402 7,843 18,187 15,479
-------- -------- -------- --------
Interest Expense:
Interest on deposits ............................................. 2,233 1,583 4,088 3,133
Interest on federal funds purchased and securities
Sold under agreement to repurchase ............................ 133 65 279 132
Interest on other short-term borrowings .......................... 7 2 11 4
-------- -------- -------- --------
Total interest expense ....................................... 2,373 1,650 4,378 3,269
-------- -------- -------- --------
Net interest income .............................................. 7,029 6,193 13,809 12,210
-------- -------- -------- --------
Provision for loan losses ........................................ 250 210 535 445
-------- -------- -------- --------
Net interest income after provision for loan losses .............. 6,779 5,983 13,274 11,765
-------- -------- -------- --------
Other income:
Service charges on deposit accounts ............................ 874 901 1,700 1,759
Gains on sale of securities available-for-sale ................. 0 0 2 0
Other operating income ......................................... 805 725 1,425 1,221
-------- -------- -------- --------
Total other income ......................................... 1,679 1,626 3,127 2,980
-------- -------- -------- --------
Other expenses:
Salaries and employee benefits ................................. 3,039 2,682 6,029 5,363
Occupancy expense .............................................. 656 603 1,336 1,208
Other operating expenses ....................................... 1,109 1,151 2,037 2,060
-------- -------- -------- --------
Total operating expenses ................................... 4,804 4,436 9,402 8,631
-------- -------- -------- --------
Income before income taxes ....................................... 3,654 3,173 6,999 6,114
-------- -------- -------- --------
Income tax provision ........................................... 1,182 1,140 2,294 2,072
-------- -------- -------- --------
Net income ....................................................... 2,472 2,033 4,705 4,042
======== ======== ======== ========
* Per share data:
Net income per weighted average shares outstanding .............. $ 3.13 $ 2.57 $ 5.97 $ 5.12
======== ======== ======== ========
Cash dividend paid per share .................................... $ 0 $ 0 $ 0 $ 0
======== ======== ======== ========
Book value per actual number of shares outstanding .............. $ 89.86 $ 83.51 $ 89.86 $ 83.51
======== ======== ======== ========
Weighted average number of shares outstanding ................... 788,538 789,241 788,538 789,241
======== ======== ======== ========
Actual number of shares outstanding ............................. 788,427 789,294 788,427 789,294
======== ======== ======== ========
*Adjusted for the effect of a 10% stock dividend issued during 2004.
3
CNB Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Net Income .......................................................... $ 2,472 $ 2,033 $ 4,705 $ 4,042
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) during period ................. 258 (3,219) (1,412) (2,764)
------- ------- ------- -------
Net Comprehensive Income/(Loss) ..................................... $ 2,730 $(1,186) $ 3,293 $ 1,278
======= ======= ======= =======
4
CNB Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(All Dollar Amounts in Thousands)
(Unaudited)
Six Months Ended
June 30,
--------
2005 2004
---- ----
Common Stock:
($10 par value; 1,500,000 shares authorized)
Balance, January 1 ................................. $ 7,898 $ 7,182
Issuance of Common Stock ........................... None None
-------- --------
Balance at end of period ........................... 7,898 7,182
-------- --------
Surplus:
Balance, January 1 ................................. 43,543 34,801
Issuance of Common Stock ........................... None None
Gain on sale of Treasury stock ..................... 0 14
-------- --------
Balance at end of period ........................... 43,543 34,815
-------- --------
Undivided profits:
Balance, January 1 ................................. 15,559 20,113
Net Income ......................................... 4,705 4,042
Cash dividends declared ............................ None None
-------- --------
Balance at end of period ........................... 20,265 24,154
-------- --------
Net unrealized holding gains/(losses) on
Available-for-sale securities:
Balance, January 1 ................................. 734 2,631
Change in net unrealized gains/(losses) ............ (1,412) (2,764)
-------- --------
Balance at end of period ........................... (678) (133)
-------- --------
Treasury stock:
Balance, January 1 ................................. (148) (104)
(1,129 shares in 2005; 837 shares in 2004)
Purchase of treasury stock ......................... (29) (142)
Reissue of treasury stock .......................... 0 146
-------- --------
Balance at end of period ........................... (178) (100)
-------- --------
(1,347 shares in 2005; 706 shares in 2004)
-------- --------
Total stockholders' equity ......................... $ 70,850 $ 65,918
======== ========
Note: Columns may not add due to rounding.
5
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(All Dollar Amounts in Thousands)
(Unaudited)
For the Six months ended
June 30,
--------
2005 2004
---- ----
OPERATING ACTIVITIES
Net Income ..................................................................................... $ 4,705 $ 4,042
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization ................................................................ 499 422
Provision for loan losses .................................................................... 535 445
Provision for deferred income taxes .......................................................... (1,491) (1,986)
Gain on sale of investment securities ........................................................ (2) 0
(Increase) decrease in accrued interest receivable ........................................... (335) (68)
(Increase) decrease in other assets .......................................................... 406 (745)
Increase in other liabilities ................................................................ 2,178 1,873
-------- --------
Net cash provided by operating activities ................................................ 6,495 3,983
-------- --------
INVESTING ACTIVITIES
Proceeds from sale of investment securities available for sale ................................. 4,002 0
Proceeds from maturities/calls of investment securities held to maturity ....................... 220 2,641
Proceeds from maturities/calls of investment securities available for sale ..................... 12,196 46,148
Purchase of investment securities available for sale ........................................... (1,000) (57,678)
Net increase in federal funds sold ............................................................. (16,000) (30,000)
Net increase in loans .......................................................................... (44,749) (28,269)
Premises and equipment expenditures ............................................................ (843) (1,248)
-------- --------
Net cash used for investing activities ................................................... (46,174) (68,406)
-------- --------
FINANCING ACTIVITIES
Dividends paid ................................................................................. (3,352) (2,870)
Net increase in deposits ....................................................................... 55,150 61,363
Net increase (decrease) in securities sold under repurchase agreement .......................... (5,204) 4,327
Net increase (decrease) in other short-term borrowings ......................................... (1,661) 682
-------- --------
Net cash provided by financing activities ................................................ 44,933 63,502
-------- --------
Net increase (decrease) in cash and due from banks ....................................... 5,254 (921)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR ....................................................... 25,793 25,021
-------- --------
CASH AND DUE FROM BANKS, June 30, 2005 AND 2004 .................................................. $ 31,047 $ 24,100
======== ========
CASH PAID FOR:
Interest ....................................................................................... $ 4,012 $ 3,308
======== ========
Income taxes ................................................................................... $ 1,778 $ 2,072
======== ========
6
CNB CORPORATION AND SUBSIDIARY (The "Company")
CNB CORPORATION (The "Parent")
THE CONWAY NATIONAL BANK (The "Bank")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net income per share - Net income per share is computed on the basis of the
weighted average number of common shares outstanding, adjusted for a 10% stock
dividend declared in September, 2004, resulting in 788,538 shares for the
six-month period ended June 30, 2005 and 789,538 shares for the six-month period
ended June 30, 2004.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances either at the Bank or
on deposit with the Federal Reserve Bank. The average amount of these reserve
balances for the six-month period ended June 30, 2005 and for the year ended
December 31, 2004 were approximately $16,423 and $15,392, respectively.
7
NOTE 3 - INVESTMENT SECURITIES
Investment securities with a par value of approximately $113,195 at June 30,
2005 and $99,580 at December 31, 2004 were pledged to secure public deposits and
for other purposes required by law.
The following summaries reflect the book value, unrealized gains and losses,
approximate market value, and tax-equivalent yields of investment securities at
June 30, 2005 and at December 31, 2004.
June 30, 2005
-------------
(Dollars in Thousands)
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1)
----- ----- ------ ----- --------
AVAILABLE FOR SALE
Federal agencies
Within one year ................................... $ 25,056 $ 184 $ 30 $ 25,210 5.02%
One to five years ................................. 150,794 228 2,027 148,995 3.45
-------- -------- -------- -------- ----
175,850 412 2,057 174,205 3.68
-------- -------- -------- -------- ----
Mortgage Backed Securities
Over ten years .................................... 797 - 39 758 3.62
-------- -------- -------- -------- ----
State, county and municipal
Within one year ................................... 1,345 15 - 1,360 6.39
One to five years ................................. 11,356 308 - 11,664 5.92
Six to ten years .................................. 3,895 232 - 4,127 6.89
-------- -------- -------- -------- ----
16,596 555 - 17,151 6.19
-------- -------- -------- -------- ----
Other-CRA Qualified Investment Fund ................. 331 - - 331 -
-------- -------- -------- -------- ----
Total available for sale ............................ $193,574 $ 967 $ 2,096 $192,445 3.89%
======== ======== ======== ======== ====
HELD TO MATURITY
State, county and municipal
Within one year ................................... $ 865 $ 11 $ - $ 876 7.49%
One to five years ................................. 3,435 153 - 3,588 7.27
-------- -------- -------- -------- ----
4,300 164 - 4,464 7.31
-------- -------- -------- -------- ----
Total held to maturity ............................ $ 4,300 $ 164 $ - $ 4,464 7.31%
======== ======== ======== ======== ====
(1) Tax equivalent adjustment based on a 34% tax rate
As of June 30, 2005, the Bank did not hold any securities of an issuer that
exceeded 10% of stockholders' equity. The net unrealized holding gains/(losses)
on available-for-sale securities component of capital is $(678) as of June 30,
2005.
8
NOTE 3 - INVESTMENT SECURITIES (Continued)
December 31, 2004
-----------------
(Dollars in Thousands)
Book Unrealized Holding Fair
Value Gains Losses Value Yield(1)
----- ----- ------ ----- --------
AVAILABLE FOR SALE
Federal agencies
Within one year ................................... $ 22,082 $ 354 $ - $ 22,436 5.33%
One to five years ................................. 167,860 883 799 167,944 3.56
-------- -------- -------- -------- ----
189,942 1,237 799 190,380 3.76
-------- -------- -------- -------- ----
State, county and municipal
Within one year ................................... 480 1 - 481 5.33
One to five years ................................. 11,780 450 - 12,230 5.85
Six to ten years .................................. 5,234 374 - 5,608 6.91
-------- -------- -------- -------- ----
17,494 825 - 18,319 6.16
-------- -------- -------- -------- ----
Mortgage Backed Securities
Over ten years .................................... 1,013 - 40 973 3.62
-------- -------- -------- -------- ----
Other-CRA Qualified Investment Fund ................. 322 - - 322 -
-------- -------- -------- -------- ----
Total available for sale ............................ $208,771 $ 2,062 $ 839 $209,994 3.96%
======== ======== ======== ======== ====
HELD TO MATURITY
State, county and municipal
Within one year ................................... $ 400 $ 4 $ - $ 404 7.49%
One to five years ................................. 3,477 187 - 3,664 7.24
Six to ten years .................................. 642 55 - 697 7.25
-------- -------- -------- -------- ----
4,519 246 - 4,765 7.27
-------- -------- -------- -------- ----
Total held to maturity ............................ $ 4,519 $ 246 $ - $ 4,765 7.27%
======== ======== ======== ======== ====
(1) Tax equivalent adjustment based on a 34% tax rate
As of December 31, 2004, the Bank did not hold any securities of an issuer that
exceeded 10% of stockholders' equity. The net unrealized holding gains/(losses)
on available-for-sale securities component of capital is $734 as of December 31,
2004.
9
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans at June 30, 2005 and December 31, 2004
by major classification:
June 30, December 31,
2005 2004
---- ----
Real estate loans - mortgage ..................... $ 289,303 $ 262,543
- construction ................. 43,807 39,525
Commercial and industrial loans .................. 76,272 66,184
Loans to individuals for household,
family and other consumer expenditures ......... 38,338 35,583
Agriculture ...................................... 2,665 1,582
All other loans, including overdrafts ............ 1,347 1,566
--------- ---------
Gross loans ................................. 451,732 406,983
--------- ---------
Less allowance for loan losses ............ (5,602) (5,104)
--------- ---------
Net loans ............................... $ 446,130 $ 401,879
========= =========
10
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, continued
Changes in the allowance for loan losses for the quarter ended and
six-month period ended June 30, 2005 and 2004 and the year ended December 31,
2004 are summarized as follows:
Quarter Six-Months
Ended Ended December,
June 30, June 30, 31,
-------- -------- ---
2005 2004 2005 2004 2004
---- ---- ---- ---- ----
Balance, beginning of period ................................ $ 5,339 $ 4,706 $ 5,104 $ 4,524 $ 4,524
------- ------- ------- ------- -------
Charge-offs:
Commercial, financial, and agricultural .................. 17 63 87 72 281
Real Estate - construction and mortgage .................. 2 0 3 17 22
Loans to individuals ..................................... 73 41 166 132 514
------- ------- ------- ------- -------
Total charge-offs .................................... $ 92 $ 104 $ 256 $ 221 $ 817
------- ------- ------- ------- -------
Recoveries:
Commercial, financial, and agricultural .................. $ 7 $ 17 $ 39 $ 30 $ 45
Real Estate - construction and mortgage .................. 78 0 83 1 1
Loans to individuals ..................................... 20 32 97 82 196
------- ------- ------- ------- -------
Total recoveries ..................................... $ 105 $ 49 $ 219 $ 113 $ 242
------- ------- ------- ------- -------
Net charge-offs/(recoveries) ................................ $ (13) $ 55 $ 37 $ 108 $ 575
------- ------- ------- ------- -------
Additions charged to operations ............................. $ 250 $ 210 $ 535 $ 445 $ 1,155
------- ------- ------- ------- -------
Balance, end of period ...................................... $ 5,602 $ 4,861 $ 5,602 $ 4,861 $ 5,104
======= ======= ======= ======= =======
Ratio of net charge-offs during the period
to average loans outstanding during the period ............. .00% .02% .00% .03% .15%
------- ------- ------- ------- -------
The entire balance is available to absorb future loan losses.
At June 30, 2005 and December 31, 2004 loans on which no interest was being
accrued totaled approximately $229 and $360, respectively and foreclosed real
estate totaled $14 and $80 respectively; and loans 90 days past due and still
accruing totaled $129 and $93, respectively.
OTHER INTEREST-BEARING ASSETS
As of June 30, 2005, the Company does not have any interest-bearing assets that
would be required to be disclosed under Item III.C.1. or 2. if such assets were
loans.
11
NOTE 5 - PREMISES AND EQUIPMENT
Property at June 30, 2005 and December 31, 2004 is summarized as follows:
June 30, December 31,
2005 2004
---- ----
Land and buildings .................................... $20,734 $20,691
Furniture, fixtures and equipment ..................... 7,236 6,824
Construction in progress .............................. 463 75
------- -------
$28,433 $27,590
Less accumulated depreciation and amortization ........ 10,461 9,962
------- -------
$17,972 $17,628
======= =======
Depreciation and amortization of bank premises and equipment charged to
operating expense was $249 and $499 for the quarter ended and six-month period
ended June 30, 2005, respectively and $895 for the year ended December 31, 2004.
The construction in process is primarily related to the construction of a new
banking office in Pawleys Island, South Carolina. Land, construction and
equipment costs are estimated at $1,750.
NOTE 6 - CERTIFICATES OF DEPOSIT IN EXCESS OF $100,000
At June 30, 2005 and December 31, 2004, certificates of deposit of $100,000
or more included in time deposits totaled approximately $120,400 and $100,042,
respectively. Interest expense on these deposits was approximately $824 and
$1,452 for the quarter ended and the six-month period ended June 30, 2005,
respectively and $2,046 for the year ended December 31, 2004.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At June 30, 2005 and December 31, 2004, securities sold under repurchase
agreements totaled $28,746 and $33,950. Securities with a book value of $44,056
($43,900 market value) and $38,711 ($39,178 market value), respectively, were
used as collateral for the agreements. The weighted-average interest rate of
these agreements was 1.88 percent and 1.43 percent at June 30, 2005 and December
31, 2004.
NOTE 8 - LINES OF CREDIT
At June 30, 2005, the Bank had unused short-term lines of credit to
purchase Federal Funds from unrelated banks totaling $27,000. These lines of
credit are available on a one to seven day basis for general corporate purposes
of the Bank. All of the lenders have reserved the right to withdraw these lines
at their option.
The Bank has a demand note through the U.S. Treasury, Tax and Loan system
with the Federal Reserve Bank of Richmond. The Bank may borrow up to $7,000
under the arrangement at a variable interest rate. The note is secured by bonds
with a market value of $3,979 at June 30, 2005. The amount outstanding under the
note totaled $1,234 and $2,895 at June 30, 2005 and December 31, 2004,
respectively.
The Bank also has a line of credit from the Federal Home Loan Bank of
Atlanta for $78,370 secured by a lien on the Bank's 1-4 family mortgages.
Allowable terms range from overnight to twenty years at varying rates set daily
by the FHLB. There were no amounts outstanding under the agreement at June 30,
2005 and December 31, 2004.
NOTE 9 - INCOME TAXES
Income tax expense for the quarters ended June 30, 2005 and June 30, 2004
on pretax income of $3,654 and $3,173 totaled $1,182 and $1,140, respectively.
Income tax expense for the six-month periods ended June 30, 2005 and June 30,
2004 on pretax income of $6,999 and $6,114 totaled $2,294 and $2,072
respectively. The provision for federal income taxes is calculated by applying
the 34% statutory federal income tax rate and increasing or reducing this amount
due to any tax-exempt interest, state bank tax (net of federal benefit),
business credits, surtax exemption, tax preferences, alternative minimum tax
calculations, or other factors. A summary of income tax components and a
reconciliation of income taxes to the federal statutory rate are included in
fiscal year-end reports.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
12
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
From time to time the bank subsidiary is a party to various litigation,
both as plaintiff and as defendant, arising from its normal operations. No
material losses are anticipated in connection with any of these matters at June
30, 2005.
In the normal course of business, the bank subsidiary is party to financial
instruments with off-balance-sheet risk including commitments to extend credit
and standby letters of credit. Such instruments have elements of credit risk in
excess of the amount recognized in the balance sheet. The exposure to credit
loss in the event of nonperformance by the other parties to the financial
instruments for commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments. Generally,
the same credit policies used for on-balance-sheet instruments, such as loans,
are used in extending loan commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose contract
amounts represent credit risk:
June 30, 2005
-------------
Loan Commitments .......................... $ 52,112
Standby letters of credits ................ 3,688
Loan commitments involve agreements to lend to a customer 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 some
involve payment of a fee. Many of the commitments are expected to expire without
being fully drawn. Therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers. Many letters of credit will expire without being drawn
upon and do not necessarily represent future cash requirements.
Management believes that its various sources of liquidity provide the
resources necessary for the bank subsidiary to fund the loan commitments and to
perform under standby letters of credit, if the need arises. Neither the Company
nor the Bank are involved in other off-balance sheet contractual relationships
or transactions that could result in liquidity needs or other commitments or
significantly impact earnings.
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Bank has a defined contribution pension plan covering all employees who
have attained age twenty-one and have a minimum of one year of service. Upon
ongoing approval of the Board of Directors, the Bank matches one-hundred percent
of employee contributions up to three percent of employee salary deferred and
fifty percent of employee contributions in excess of three percent and up to
five percent of salary deferred. The Board of Directors may also make
discretionary contributions to the Plan. For the three-month and six-month
periods ended June 30, 2005 and year ended December 31, 2004, $157, $311, and
$595, respectively, was charged to operations under the plan.
NOTE 12 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
financial statements. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital classification is also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
13
NOTE 12 - REGULATORY MATTERS - Continued
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in the table
below) of Tier I capital to adjusted total assets (Leverage Capital ratio) and
minimum ratios of Tier I and total capital to risk-weighted assets. To be
considered adequately capitalized under the regulatory framework for prompt
corrective action, the Bank must maintain minimum Tier I leverage, Tier I
risk-based and total risked-based ratios as set forth in the table. The Bank's
actual capital ratios are also presented in the table below as of June 30, 2005:
To be
well capitalized
For under prompt
Capital adequacy corrective action
Purposes provisions
Actual Minimum Minimum
------ ------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ------- ------ ------
Total Capital (to risk weighted assets) .......... $73,050 15.52% 37,664 8.0% $47,080 10.0%
Tier I Capital (to risk weighted assets) ......... 67,448 14.33 18,832 4.0 28,248 6.0
Tier I Capital (to average assets) ............... 67,448 9.60 28,090 4.0 35,112 5.0
NOTE 13 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of CNB Corporation (parent
company only):
CONDENSED BALANCE SHEET
(Unaudited)
June 30,
--------
ASSETS 2005 2004
- ------ ---- ----
Cash .......................................... $ 4,043 $ 2,377
Investment in subsidiary ...................... 66,770 61,693
Fixed Assets .................................. - 1,811
Other assets .................................. 37 37
------- -------
$70,850 $65,918
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liability ............................... $ 0 $ 0
Stockholders' equity .......................... 70,850 65,918
------- -------
$70,850 $65,918
======= =======
CONDENSED STATEMENT OF INCOME
(Unaudited)
For the six-month period ended
June 30,
--------
2005 2004
---- ----
EQUITY IN NET INCOME OF SUBSIDIARY ............. $ 4,766 $ 4,095
OTHER INCOME ................................... 0 0
OTHER EXPENSES ................................. (61) (53)
------- -------
Net Income .................................. $ 4,705 $ 4,042
======= =======
14
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(All dollar amounts in thousands, except per share data.)
Management's Discussion and Analysis is provided to afford a clearer
understanding of the major elements of the corporation's results of operations,
financial condition, liquidity, and capital resources. The following discussion
should be read in conjunction with the corporation's financial statements and
notes thereto and other detailed information appearing elsewhere in this report.
In addition, the results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected for the fiscal
year. The accompanying consolidated financial statements include all accounts of
the Company and the Bank. All significant intercompany accounts and transactions
have been eliminated in consolidation. The accompanying unaudited consolidated
financial statements at June 30, 2005 and for the three-month and six-month
periods ending June 30, 2005 and 2004 have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q for the Securities and
Exchange Commission. Accordingly, they do not include all information and
footnotes required by GAAP for complete financial statements. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
DISTRIBUTION OF ASSETS AND LIABILITIES
The Company maintains a conservative approach in determining the distribution of
assets and liabilities. Loans have increased 15.7% from $390,303 at June 30,
2004 to $451,732 at June 30, 2005 and have increased as a percentage of total
assets from 58.8% to 62.7% over the same period as loan demand has strengthened
in our market. Securities and federal funds sold have decreased as a percentage
of total assets from 33.9% at June 30, 2004 to 29.5% at June 30, 2005. This
level of investments and federal funds sold provides for a more than adequate
supply of secondary liquidity. Management has sought to build the deposit base
with stable, relatively non-interest-sensitive deposits by offering the small to
medium deposit account holders a wide array of deposit instruments at
competitive rates. Non-interest-bearing demand deposits showed no change as a
percentage of total assets from 18.6% at June 30, 2004 to 18.6% at June 30,
2005. As more customers, both business and personal, are attracted to
interest-bearing deposit accounts, we expect the percentage of demand deposits
to decline over the long-term. Interest-bearing deposits have increased slightly
from 66.4% of total assets at June 30, 2004 to 66.7% at June 30, 2005 while
securities sold under agreement to repurchase have decreased from 4.4% to 4.0%
over the same period.
The following table sets forth the percentage relationship to total assets of
significant component's of the corporation's balance sheets as of June 30, 2005
and 2004:
June 30,
--------
2005 2004
---- ----
Assets:
Earning assets:
Loans ......................................................................................... 62.7% 58.8%
Investment securities ......................................................................... .6 .8
Securities Available for Sale ................................................................. 26.7 28.5
Federal funds sold and securities purchased under agreement to resell ......................... 2.2 4.6
----- -----
Total earning assets ....................................................................... 92.2 92.7
----- -----
Other assets .................................................................................. 7.8 7.3
----- -----
Total assets ............................................................................... 100.0% 100.0%
----- -----
Liabilities and stockholder's equity:
Interest-bearing liabilities:
Interest-bearing deposits .................................................................... 66.7% 66.4%
Federal funds purchased and securities sold under agreement to repurchase .................... 4.0 4.4
Other short-term borrowings .................................................................. .2 .2
----- -----
Total interest-bearing liabilities ....................................................... 70.9 71.0
----- -----
Noninterest-bearing deposits ........................................................... 18.6 18.6
Other liabilities ............................................................................ .7 .5
Stockholders' equity ......................................................................... 9.8 9.9
----- -----
Total liabilities and stockholders' equity ............................................... 100.0% 100.0%
----- -----
15
RESULTS OF OPERATION
CNB Corporation experienced earnings for the three-month periods ended June 30,
2005 and 2004 of $2,472 and $2,033, respectively, resulting in a return on
average assets of 1.38% and 1.25% and a return on average stockholders' equity
of 14.21% and 12.18%.
CNB Corporation experienced earnings for the six-month periods ended June 30,
2005 and 2004 of $4,705 and $4,042, respectively, resulting in a return on
average assets of 1.34% and 1.27% and a return on average stockholders' equity
of 13.66% and 12.17%.
The earnings were primarily attributable to net interest margins in each period
(see Net Income-Net Interest Income). Other factors include management's ongoing
effort to maintain other income at adequate levels (see Net Income - Other
Income) and to control other expenses (see Net Income - Other Expenses). This
level of earnings, coupled with a moderate dividend policy, have supplied the
necessary capital funds to support the growth in total assets. Total assets have
increased $56,899 or 8.6% from $664,171 at June 30, 2004 to $721,070 at June 30,
2005. The following table sets forth the financial highlights for the
three-month and six-month periods ending June 30, 2005 and June 30, 2004:
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
Three-Month Period Six-Month Period
Ended June 30, Ended June 30,
Percent Percent
Increase Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
---- ---- ---------- ---- ---- ----------
Net interest income after provision for
loan losses ......................................... 6,779 5,983 13.3% 13,274 11,765 12.8%
Income before income taxes ................................. 3,654 3,173 15.2 6,999 6,114 14.5
Net Income ................................................. 2,472 2,033 21.6 4,705 4,042 16.4
Per Share (1) .............................................. 3.13 2.57 21.8 5.97 5.12 16.6
Cash dividends declared .................................... 0 0 - 0 0 -
Per Share (1) ......................................... 0 0 - 0 0 -
Total assets ............................................... 721,070 664,171 8.6% 721,070 664,171 8.6
Total deposits ............................................. 615,514 564,476 9.0 615,514 564,476 9.0
Loans ...................................................... 451,732 390,303 15.7 451,732 390,303 15.7
Investment securities and securities available for sale .... 196,745 194,573 1.1 196,745 194,573 1.1
Stockholders' equity ....................................... 70,850 65,918 7.5 70,850 65,918 7.5
Book value per share (1) ............................... 89.86 83.52 7.6 89.86 83.52 7.6
Ratios (2):
Annualized return on average total assets .................. 1.38% 1.25% 10.4% 1.34% 1.27% 5.5%
Annualized return on average stockholders' equity .......... 14.21% 12.18% 16.7% 13.66% 12.17% 12.2%
(1) Adjusted for the effect of a 10% stock dividend issued during 2004.
(2) For the three-month period ended June 30, 2005 and June 30, 2004,
average total assets amounted to $719,078 and $652,757 with average
stockholders' equity totaling $69,570 and $66,779, respectively. For the
six-month periods ended June 30, 2005 and June 30, 2004, average total
assets amounted to $702,286 and $638,536 with average stockholders'
equity totaling $68,905 and $66,420 respectively.
16
NET INCOME
Net Interest Income - Earnings are dependent to a large degree on net interest
income, defined as the difference between gross interest and fees earned on
earning assets, primarily loans and securities, and interest paid on deposits
and borrowed funds. Net interest income is affected by the interest rates earned
or paid and by volume changes in loans, securities, deposits, and borrowed
funds.
Interest rates paid on deposits and borrowed funds and earned on loans and
investments have generally followed the fluctuations in market interest rates in
2005 and 2004. However, fluctuations in market interest rates do not necessarily
have a significant impact on net interest income, depending on the bank's rate
sensitivity position. A rate sensitive asset (RSA) is any loan or investment
that can be repriced either up or down in interest rate within a certain time
interval. A rate sensitive liability (RSL) is an interest paying deposit or
other liability that can be repriced either up or down in interest rate within a
certain time interval. When a proper balance between RSA and RSL exists, market
interest rate fluctuations should not have a significant impact on earnings. The
larger the imbalance, the greater the interest rate risk assumed by the bank and
the greater the positive or negative impact of interest rate fluctuations on
earnings. The bank seeks to manage its assets and liabilities in a manner that
will limit interest rate risk and thus stabilize long-run earning power.
Management believes that a rise or fall in interest rates will not materially
affect earnings.
The Bank has maintained net interest margins for the three-month period and
six-month periods ended June 30, 2005, of 4.30% and 4.32%, respectively, and
4.18% and 4.21%, respectively, for the same periods in 2004, as compared to
management's long-term target of 4.35%. Net interest margins have been
compressed at the bank and industry-wide as we have experienced almost fifty
year lows in market interest rates. We anticipate short-term interest rates to
increase throughout 2005 which will enhance our earnings potential through a
wider net interest margin.
Fully-tax-equivalent net interest income showed a 13.1% increase from $6,317 for
the three-month period ended June 30, 2004 to $7,146 for the three-month period
ended June 30, 2005. During the same period, total fully-tax-equivalent interest
income increased by 19.5% from $7,967 to $9,519 and total interest expense
increased by 43.8% from $1,650 to $2,373. Fully-tax-equivalent net interest
income as a percentage of total earning assets has shown an increase of .12%
from 4.18% for the three-month period ended June 30, 2004 to 4.30% for the
three-month period ended June 30, 2005.
Fully-tax-equivalent net interest income showed a 12.7% increase from $12,460
for the six-month period ended June 30, 2004 to $14,044 for the six-month period
ended June 30, 2005. During the same period, total fully-tax-equivalent interest
income increased by 17.1% from $15,729 to $18,422 and total interest expense
increased by 33.9% from $3,269 to $4,378. Fully-tax-equivalent net interest
income as a percentage of total earning assets has shown an increase of .11%
from 4.21% for the six-month period ended June 30, 2004 to 4.32% for the
six-month period ended June 30, 2005.
The tables on the following four pages present average balance sheets, average
yield and interest earned on earning assets, and average rate and interest
expense on interest bearing liabilities for the three-month and six-month
periods ended June 30, 2005 and 2004, and a summary of changes in net interest
income resulting from changes in volume and changes in rate between the
three-month and six-month periods ended June 30, 2005 and 2004.
17
CNB Corporation and Subsidiary
Average Balances, Yields, and Rates
(Dollars in Thousands)
Three Months Ended 6/30/05 Three Months Ended 6/30/04
-------------------------- --------------------------
Interest Avg. Ann. Interest Avg. Ann.
Avg. Income/ Yield or Avg. Income/ Yield or
Balance Expense(1) Rate Balance Expense(1) Rate
------- ---------- ---- ------- ---------- ----
Assets:
Earning assets:
Loans, net of unearned income .................. $441,049 $ 7,349 6.67% $385,100 $ 5,927 6.16%
Securities:
Taxable ...................................... 177,066 1,643 3.71 171,608 1,618 3.77
Tax-exempt ................................... 21,447 343 6.40 21,757 364 6.69
Federal funds sold and securities purchased under
agreement to resell .......................... 25,874 184 2.84 25,884 58 .90
-------- -------- -------- --------
Total earning assets ....................... 665,436 9,519 5.72 604,349 7,967 5.27
-------- -------- --------
Other assets ..................................... 53,642 48,408
-------- --------
Total assets ............................... $719,078 $652,757
======== ========
Liabilities and stockholder equity
Interest-bearing liabilities:
Interest-bearing deposits ...................... $484,787 2,233 1.84 $439,516 1,583 1.44
Federal funds purchased and securities sold under
agreement to repurchase ...................... 29,963 133 1.78 26,007 65 1.00
Other short-term borrowings .................... 986 7 2.84 1,075 2 .74
-------- --------- -------- -------
Total interest-bearing liabilities ......... $515,736 $ 2,373 1.84 $465,598 $ 1,650 1.41
-------- -------- -------- -------
Noninterest-bearing deposits ..................... 129,327 117,505
Other liabilities ................................ 4,445 1,875
Stockholders' equity ............................. 69,570 66,779
-------- --------
Total liabilities and stockholders' equity . $719,078 $652,757
======== ========
Net interest income as a percent of total
earning assets ................................ $665,436 $ 7,146 4.30 $604,349 $ 6,317 4.18
======== ======== ======== =======
(1) Tax-equivalent adjustment based on a 34% tax rate $ 117 $ 124
======== =======
Ratios:
Annualized return on average total assets ............ 1.38 1.25
Annualized return on average stockholders' equity .... 14.21 12.18
Cash dividends declared as a percent of net income ... 0 0
Average stockholders' equity as a percent of:
Average total assets ............................... 9.67 10.23
Average total deposits ............................. 11.33 11.99
Average loans ...................................... 15.77 17.34
Average earning assets as a percent of
average total assets .............................. 92.54 92.58
18
CNB Corporation and Subsidiary
Average Balances, Yields, and Rates
(Dollars in Thousands)
Six Months Ended 6/30/05 Six Months Ended 6/30/04
------------------------ ------------------------
Interest Avg. Ann. Interest Avg. Ann.
Avg. Income/ Yield or Avg. Income/ Yield or
Balance Expense(1) Rate Balance Expense(1) Rate
------- ---------- ---- ------- ---------- ----
Assets:
Earning assets:
Loans, net of unearned income .................. $430,491 $ 14,152 6.57% $377,400 $ 11,656 6.18%
Securities:
Taxable ...................................... 179,716 3,332 3.71 168,071 3,234 3.85
Tax-exempt ................................... 21,747 691 6.35 23,207 735 6.33
Federal funds sold and securities purchased under
agreement to resell .......................... 18,262 247 2.71 23,387 104 .89
-------- -------- -------- --------
Total earning assets ....................... 650,216 18,422 5.67 592,065 15,729 5.31
-------- -------- -------- --------
Other assets ..................................... 52,070 46,471
-------- --------
Total assets ............................... $702,286 $638,536
======== ========
Liabilities and stockholder equity
Interest-bearing liabilities:
Interest-bearing deposits ...................... $468,904 4,088 1.74 $430,589 3,133 1.46
Federal funds purchased and securities sold under
agreement to repurchase ...................... 33,505 279 1.67 26,040 132 1.01
Other short-term borrowings .................... 939 11 2.34 1,046 4 .76
-------- -------- -------- --------
Total interest-bearing liabilities ......... $503,348 $ 4,378 1.74 $457,675 $ 3,269 1.43
-------- -------- -------- --------
Noninterest-bearing deposits ..................... 125,834 111,078
Other liabilities ................................ 4,199 3,363
Stockholders' equity ............................. 68,905 66,420
-------- --------
Total liabilities and stockholders' equity . $702,286 $638,536
======== ========
Net interest income as a percent of total
earning assets ................................ $650,216 $ 14,044 4.32 $592,065 $ 12,460 4.21
======== ======== ======== ========
(1) Tax-equivalent adjustment based on a 34%
tax rate ...................................... $ 235 $ 250
======== ========
Ratios:
Annualized return on average total assets ............ 1.34 1.27
Annualized return on average stockholders' equity .... 13.66 12.17
Cash dividends declared as a percent of net income ... 0 0
Average stockholders' equity as a percent of:
Average total assets ............................... 9.81 10.40
Average total deposits ............................. 11.59 12.26
Average loans ...................................... 16.01 17.60
Average earning assets as a percent of
average total assets .............................. 92.59 92.72
19
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Three Months Ended June 30, 2005 and 2004
(Dollars in Thousands)
Average Average Interest Interest
Volume Volume Yield/Rate Yield/Rate Earned/Paid Earned/Paid
2005 2004 2005 (1) 2004 (1) 2005 (1) 2004 (1)
---- ---- -------- -------- -------- --------
Earning Assets:
Loans , Net of unearned Income (2) ........ 441,049 385,100 6.67% 6.16% 7,349 5,927
Investment securities:
Taxable ................................ 177,066 171,608 3.71% 3.77% 1,643 1,618
Tax-exempt ............................. 21,447 21,757 6.40% 6.69% 343 364
Federal funds sold and Securities
purchased under agreement to resell .... 25,874 25,884 2.84% .90% 184 58
-------- -------- ------ ------ ------- -------
Total Earning Assets ....................... 665,436 604,349 5.72% 5.27% 9,519 7,967
======== ======== ===== ===== ======= =======
Interest-bearing Liabilities:
Interest-bearing deposits ................ 484,787 439,516 1.84% 1.44% 2,233 1,583
Federal funds purchased and securities
sold under agreement to repurchase ..... 29,963 26,007 1.78% 1.00% 133 65
Other short-term borrowings .............. 986 1,075 2.84% .74% 7 2
-------- -------- ----- ------ ------- -------
Total Interest-bearing Liabilities ......... 515,736 466,598 1.84% 1.41% 2,373 1,650
-------- -------- ----- ----- ------- -------
Interest-free Funds Supporting
Earning Assets ........................... 149,700 137,751
-------- --------
Total Funds Supporting Earning Assets ...... 665,436 604,349 1.42% 1.09% 2,373 1,650
======== ======== ===== ===== ====== ======
Interest Rate Spread ....................... 3.88% 3.86%
Impact of Non-interest-bearing Funds
on Net Yield on Earning Assets ........... .42% .32%
----- ----- ------- -------
Net Yield on Earning Assets ................ 4.30% 4.18% 7,146 6,317
===== ===== ======= =======
Change
Change Change Due to
Due to Due to Rate X
Variance Rate Volume Volume
-------- ---- ------ ------
Earning Assets:
Loans, Net of unearned Income (2) .......... 1,422 491 862 69
Investment securities:
Taxable ................................ 25 (26) -
51
Tax-exempt ............................. (21) (16) (5) -
Federal funds sold and Securities
purchased under agreement to resell .... 126 126 - -
------- ------ ----- -----
Total Earning Assets ....................... 1,552 575 908 69
======= ====== ===== =====
Interest-bearing Liabilities:
Interest-bearing deposits ................ 650 439 163 48
Federal funds purchased and securities
sold under agreement to repurchase ..... 68 51 10 7
Other short-term borrowings .............. 5 5 - -
------- ------ ----- -----
Total Interest-bearing Liabilities ......... 723 495 173 55
------- ------ ----- -----
Interest-free Funds Supporting
Earning Assets
Total Funds Supporting Earning Assets ...... 723 495 173 55
======= ====== ===== =====
(1) Tax-equivalent adjustment based on a 34% tax rate.
(2) Includes non-accruing loans which does not have a material effect on the Net
Yield on Earning Assets.
20
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Six Months Ended June 30, 2005 and 2004
(Dollars in Thousands)
Average Average Interest Interest
Volume Volume Yield/Rate Yield/Rate Earned/Paid Earned/Paid
2005 2004 2005 (1) 2004 (1) 2005 (1) 2004 (1)
---- ---- -------- -------- -------- --------
Earning Assets:
Loans, Net of unearned Income (2) ......... 430,491 377,400 6.57% 6.18% 14,152 11,656
Investment securities:
Taxable ............................... 179,716 168,071 3.71% 3.85% 3,332 3,234
Tax-exempt ............................ 21,747 23,207 6.35% 6.33% 691 735
Federal funds sold and Securities
purchased under agreement to resell ... 18,262 23,387 2.71% .89% 247 104
-------- -------- ---- ---- ------- -------
Total Earning Assets ...................... 650,216 592,065 5.67% 5.31% 18,422 15,729
======== ======== ==== ==== ======= =======
Interest-bearing Liabilities:
Interest-bearing deposits ............... 468,904 430,589 1.74% 1.46% 4,088 3,133
Federal funds purchased and securities
sold under agreement to repurchase .... 33,505 26,040 1.67% 1.01% 279 132
Other short-term borrowings ............. 939 1,046 2.34% .76% 11 4
-------- --------- ---- ---- ------- -------
Total Interest-bearing Liabilities ........ 503,348 457,675 1.74% 1.43% 4,378 3,269
-------- --------- ---- ---- ------- -------
Interest-free Funds Supporting
Earning Assets .......................... 146,868 134,390
-------- ---------
Total Funds Supporting Earning Assets ..... 650,216 592,065 1.35% 1.10% 4,378 3,269
======== ========= ==== ==== ======= =======
Interest Rate Spread ...................... 3.93% 3.88%
Impact of Non-interest-bearing Funds
on Net Yield on Earning Assets .......... .39% .33%
---- ---- -------
Net Yield on Earning Assets ............... 4.32% 4.21% 14,044 12,460
==== ==== ======= =======
Change
Change Change Due to
Due to Due to Rate X
Variance Rate Volume Volume
-------- ---- ------ ------
Earning Assets:
Loans, Net of unearned Income (2) ......... 2,496 736 1,640 120
Investment securities:
Taxable ............................... 98 (117) 224 (9)
Tax-exempt ............................ (44) 2 (46) ---
Federal funds sold and Securities
purchased under agreement to resell ... 143 213 (23) (47)
------ ------ ------ ---
Total Earning Assets ...................... 2,693 834 1,795 64
====== ====== ====== ===
Interest-bearing Liabilities:
Interest-bearing deposits ............... 955 603 280 72
Federal funds purchased and securitie
sold under agreement to repurchase .... 147 86 38 23
Other short-term borrowings ............. 7 8 (1) -
------ ----- ------ ---
Total Interest-bearing Liabilities ........ 1,109 697 317 95
------ ----- ------ ---
Interest-free Funds Supporting
Earning Assets
Total Funds Supporting Earning Assets ..... 1,109 697 317 95
====== ====== ====== ====
(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
21
NET INCOME (continued)
Provision for Loan Losses - It is the policy of the Bank to maintain the
allowance for loan losses at the greater of 1.00% of net loans or the percentage
based on a level to cover potential losses identified in the portfolio.
The provision for loan losses was $250 for the three-month period ended June 30,
2005 and $210 for the three-month period ended June 30, 2004. Net loan
charge-offs/(recoveries) totaled $(13) for the three-month period ended June 30,
2005 and $55 for the same period in 2004.
The provision for loan losses was $535 for the six-month period ended June 30,
2005 and $445 for the six-month period ended June 30, 2004. Net loan
charge-offs/(recoveries) totaled $37 for the six-month period ended June 30,
2005 and $108 for the same period in 2004.
The allowance for loan losses as a percentage of net loans was 1.26% at June 30,
2005 and June 30, 2004. The increased provisions during the three-month and
six-month periods ended June 30, 2005 reflect the continued growth in the loan
portfolio.
Securities Transactions - At June 30, 2005, December 31, 2004, and June 30, 2004
market value appreciation/(depreciation) in the investment portfolio totaled
$(965), $1,469, and $22, respectively. As indicated, market values have
decreased due to higher market interest rates in 2005. Security gains of $2
resulted from the sale of $4,000 in AFS securities during the first quarter of
2005 to supplement liquidity.
Other Income - Other income, net of any gains/losses on security transactions,
increased by 3.3% from $1,626 for the three-month period ended June 30, 2004 to
$1,679 for the three-month period ended June 30, 2005.
Other income, net of any gains/losses on security transactions, increased by
4.9% from $2,980 for the six-month period ended June 30, 2004 to $3,127 for the
six-month period ended June 30, 2005.
This increase in the three-month and six-month period ended June 30, 2005 other
income was due to higher merchant discount income, offset somewhat by slightly
lower service charges on deposit accounts income.
Other Expenses - Other expenses increased by 8.3% from $4,436 for the
three-month period ended June 30, 2004 to $4,804 for the three-month period
ended June 30, 2005. The major components of other expenses are salaries and
employee benefits which increased 13.3% from $2,682 to $3,039; occupancy expense
which increased 8.8% from $603 to $656; and other operating expenses which
decreased by 3.6% from $1,151 to $1,109.
Other expenses increased by 8.9% from $8,631 for the six-month period ended June
30, 2004 to $9,402 for the six-month period ended June 30, 2005. The major
components of other expenses are salaries and employee benefits which increased
12.4% from $5,363 to $6,029; occupancy expense which increased 10.6% from $1,208
to $1,336; and other operating expense which decreased by 1.1% from $2,060 to
$2,037.
The increase in the three-month period and six-month period ended June 30, 2005
salaries and employee benefits was due to normal pay increases and the increased
costs of providing employee benefits, particularly health insurance coverage. In
addition, in 2005 the Company began accruing year-end bonus awards to bank staff
in the amount of $135 per quarter as these awards have increased in size over
the past few years. Occupancy expense continues to grow due to the addition of
new banking facilities and staff. Looking ahead, the construction, staffing, and
equipping of a new banking office in Pawleys Island, South Carolina, expected to
be competed in the fourth quarter of 2005, will add to future occupancy
expenses.
Income Taxes - Provisions for income taxes increased 3.7% from $1,140 for the
three-month period ended June 30, 2004 to $1,182 for the three-month period
ended June 30, 2005. Income before income taxes less interest on tax-exempt
investment securities increased by 16.9% from $2,933 for the three-month period
ended June 30, 2004 to $3,428 for the same period in 2005. State tax liability
increased as income before income taxes increased 15.2% from $3,173 to $3,654
during the same period.
Provisions for income taxes increased 10.7% from $2,072 for the six-month period
ended June 30, 2004 to $2,294 for the six-month period ended June 30, 2005.
Income before income taxes less interest on tax-exempt investment securities
increased by 16.2% from $5,629 for the six-month period ended June 30, 2004 to
$6,543 for the same period in 2005 and state tax liability increased as income
before income taxes increased 14.5% from $6,114 to $6,999 during the same
period.
22
LIQUIDITY
The bank's liquidity position is primarily dependent on short-term demands for
funds caused by customer credit needs and deposit withdrawals and upon the
liquidity of bank assets to meet these needs. The bank's liquidity sources
include cash and due from banks, federal funds sold, and short-term investments.
In addition, the bank has established federal funds lines of credit from
correspondent banks and has the ability to borrow funds from the Federal Reserve
System and the Federal Home Loan Bank of Atlanta. Management feels that
short-term and long-term liquidity sources are more than adequate to meet
funding needs, including the funding of off-balance sheet loan commitments and
standby letters of credit, if the need arises. Neither the Company nor the Bank
are involved in other off-balance sheet contractual relationships or
transactions that could result in liquidity needs or other commitments or
significantly impact earnings. The Bank has begun construction of a new banking
office in Pawleys Island, South Carolina. Land, construction, and equipment
costs are estimated at $1,750.
CAPITAL RESOURCES
Total stockholders' equity was $70,850 and $67,585 at June 30, 2005 and December
31, 2004 representing 9.83% and 10.06% of total assets, respectively. At June
30, 2005, the Bank exceeds quantitative measures established by regulation to
ensure capital adequacy (see NOTE 12 to the consolidated unaudited financial
statements - REGULATORY MATTERS). Capital is considered sufficient by management
to meet current and prospective capital requirements and to support anticipated
growth in bank operations.
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CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States of America in the
preparation of our financial statements. Our significant accounting policies are
described in the notes to the consolidated financial statements at December 31,
2004 as filed on our annual report on Form 10-K. Certain accounting policies
involve significant judgments and assumptions by us which have a material impact
on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on the historical experience and other factors,
which we believe to be reasonable under the circumstances. Because of the nature
of the judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a major impact on our carrying values
of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of our
consolidated financial statements. Refer to the portions of our 2004 Annual
Report on Form 10-K and this Form 10-Q that address our allowance for loan
losses for description of our processes and methodology for determining our
allowance for loan losses.
RISKS AND UNCERTAINTIES
In the normal course of its business the Company encounters two significant
types of risks: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different basis, than
its interest-earning assets. Credit risk is the risk of default on the Company's
loan portfolio that results from borrower's inability or unwillingness to make
contractually required payments. Market risk reflects changes in the value of
collateral underlying loans receivable and the valuation of real estate held by
the Company.
The Company is subject to the regulations of various governmental agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions from the regulators'
judgments based on information available to them at the time of their
examination.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises principally from interest rate risk inherent in
its lending, deposit and borrowing activities. Management actively monitors and
manages its interest rate risk exposure. In addition to other risks which the
Company manages in the normal course of business, such as credit quality and
liquidity risk, management considers interest rate risk to be a significant
market risk that could potentially have a material effect on the Company's
financial condition and results of operations (See Net Income - Net Interest
Income). Other types of market risks, such as foreign currency risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Item 4. CONTROLS AND PROCEDURES
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that such controls and
procedures, as of the end of the period covered by this quarterly report, were
effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has material affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II
Item 1. LEGAL PROCEEDINGS
See Note 10 of the Notes to Consolidated Interim Financial statements for a
discussion of legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of shareholders of CNB Corporation was held in the Conway
Banking Office of The Conway National Bank at 1411 Fourth Avenue, Conway, South
Carolina, at 4:15 p.m., Conway, South Carolina time, on May 10, 2005.
The purpose of the Annual Meeting was to: (1) elect four Directors; and (2)
ratify the appointment of Elliott, Davis, LLC as the Company's independent
registered public accountants for the fiscal year ending December 31, 2005 and
the result of the vote was as follows:
1. Election of Directors:
Name Votes For Votes Withheld Broker Non-Votes
---- --------- -------------- ----------------
Harold G. Cushman, Jr ....... 563,264 2,281 0
H. Buck Cutts ............... 563,264 2,281 0
Robert P Hucks .............. 563,264 2,281 0
Howard B. Smith, III ........ 563,264 2,281 0
The following directors' terms continued after the annual meeting: Willis J.
Duncan, W. Jennings Duncan, James W. Barnette, Jr., Paul R. Dusenbury, and
Richard M. Lovelace, Jr.. Regrettably, John K. Massey passed away on March 18,
2005. On June 14, 2005, the Board of Directors appointed and elected William R.
Benson to fill the vacancy on the Board of Directors of CNB due to the death of
Mr. Massey.
2. Ratification of Appointment of Elliott Davis, LLC:
Votes For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
565,545 0 0 0
Item 5. OTHER INFORMATION
There was no information required to be disclosed by the Company in a report on
Form 8-K during the six-month period ended June 30, 2005 that was not so
disclosed.
Item 6. EXHIBITS
All exhibits, the filing of which are required with this Form, are listed below
3.1 By-Laws of CNB Corporation as amended June 14, 2005.
31.1 Certification of Principal Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Corporation
(Registrant)
s/Paul R. Dusenbury
---------------------------------------------
Paul R. Dusenbury
Executive Vice President
Treasurer and Chief Financial Officer
Date: August 9, 2005
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