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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, 1998.
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: (843) 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, 1999, 597,431 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 $59,145,669.
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 32-55
ITEM 9. Disagreements on Accounting and Financial Disclosure 55
PART III
ITEM 10. Directors and Executive Officers of the Registrant 56-60
ITEM 11. Executive Compensation 61-63
ITEM 12. Security Ownership of Certain Beneficial Owners 64
and Management
ITEM 13. Certain Relationships and Related Transactions 64
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, Notes to 65
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), Myrtle Beach in the City of Myrtle Beach
(1995), and West Conway in Conway (1998). 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 198 full-time-equivalent
employees at its principal office and nine 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, First Union National Bank, First
Citizens Bank and Trust Company, Branch Bank and Trust and Wachovia, N.A..
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 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, 1998, has 598,681 shares issued and 596,615 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
1998 March 31 June 30 September 30 December 31
Interest income $ 7,187 $ 7,554 $ 7,737 $ 7,565
Interest expense 3,166 3,282 3,324 3,258
Net interest income 4,021 4,272 4,413 4,307
Provision for loan losses 190 175 160 155
Net interest income after
provision for loan losses 3,831 4,097 4,253 4,152
Noninterest income 816 963 1,161 992
Noninterest expenses 2,754 2,758 2,906 3,518
Income before income taxes 1,893 2,302 2,508 1,626
Income taxes 657 756 821 587
Net income $ 1,236 $ 1,546 $ 1,687 $ 1,039
Net income per share $ 2.07 $ 2.58 $ 2.83 $ 1.74
Weighted average shares outstanding 598,098 597,768 597,258 596,684
1997
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
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 12/31/98
Average Interest Avg. Annual
Balance Income/ Yield or
Expense(2) Rate
Assets:
Earning assets
Loans, net of
unearned income $228,057 $20,755 9.10%
Investment securities:
Taxable 118,941 7,187 6.04
Tax-exempt 13,771 1,053 7.65
Federal funds sold and
securities purchased under
agreement to resell 26,890 1,406 5.23
Total earning assets $387,659 $30,401 7.84
Other assets 26,219
Total assets $413,878
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits $273,469 11,432 4.18
Federal funds purchased and
securities sold under
agreement to repurchase 34,274 1,514 4.42
Other short-term borrowings 1,514 84 5.55
Total interest-bearing
liabilities $309,257 $13,030 4.21
Noninterest-bearing deposits 62,582
Other liabilities 1,841
Stockholders' equity 40,198
Total liabilities and
stockholders' equity $413,878
Net interest income as a
percent of total
earning assets $387,659 $17,371 4.48%
(1) Tax-equivalent adjustment
based on a 34% tax rate $ 358
Ratios:
Annualized return on average total assets 1.33%
Annualized return on average stockholders' equity 13.70
Cash dividends declared as a percent of net income 37.94
Average stockholders' equity as a percent of:
Average total assets 9.71
Average total deposits 11.96
Average loans, net of unearned income 17.63
Average earning assets as a percent of
average total assets 93.67%
(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
$422 as of December 31, 1998 are included in loans, net of unearned
income, for purpose of this analysis.
8
CNB Corporation and Subsidiary
Selected Financial Data
Twelve Months Ended 12/31/97
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.
9
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.
10
CNB Corporation and Subsidiary
Rate/Volume Variance Analysis
For the Twelve Months Ended December 31, 1998 and 1997
(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
1998 1997 1998 (1) 1997 (1) 1998 (1) 1997 (1) Variance Rate Volume Volume
Earning Assets:
Loans, Net of unearned
income (2) 228,057 204,987 9.10% 9.32% 20,755 19,110 1,645 (451) 2,147 (51)
Investment securities:
Taxable 118,941 118,900 6.04% 6.05% 7,187 7,191 (4) (7) 3 -
Tax-exempt 13,771 13,841 7.65% 7.82% 1,053 1,083 (30) (24) (6) -
Federal funds sold and
securities purchased under
agreement to resell 26,890 13,730 5.23% 5.41% 1,406 743 663 (25) 712 (24)
Total Earning Assets 387,659 351,458 7.84% 8.00% 30,401 28,127 2,274 (507) 2,856 (75)
Interest-bearing Liabilities:
Interest-bearing deposits 273,469 241,009 4.18% 4.15% 11,432 10,009 1,423 72 1,342 9
Federal funds purchased and
securities sold under
agreement to repurchase 34,274 36,148 4.42% 4.64% 1,514 1,676 (162) (80) (86) 4
Other short-term borrowings 1,514 1,562 5.55% 5.06% 84 79 5 8 (3) -
Total Interest-bearing
Liabilities 309,257 278,719 4.21% 4.22% 13,030 11,764 1,266 - 1,253 13
Interest-free Funds
Supporting Earning Assets 78,402 72,739
Total Funds Supporting
Earning Assets 387,659 351,458 3.36% 3.34% 13,030 11,764 1,266 - 1,253 13
Interest Rate Spread 3.63% 3.78%
Impact of Non-interest-bearing
Funds on Net Yield on Earning
Assets .85% .88%
Net Yield on Earning Assets 4.48% 4.66% 17,371 16,363
(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, 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.
12
INVESTMENT SECURITIES
Investment securities with a par value of $74,500, $69,965, and $55,665 at
December 31, 1998, 1997, and 1996, 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, 1998, 1997, and 1996.
December 31, 1998
Book Unrealized Fair
Value Gains Losses Value Yield(1)
AVAILABLE FOR SALE
United States Treasury
Within one year $ 8,011 $ 59 $ - $ 8,070 6.28%
One to five years 5,962 179 - 6,141 6.09%
13,973 238 - 14,211 6.20%
Federal agencies
Within one year 5,171 30 - 5,201 6.20%
One to five years 60,289 520 87 60,722 5.77%
65,460 550 87 65,923 5.81%
State, county and municipal
Within one year 325 7 - 332 7.90%
Other-restricted
Federal Reserve
Bank Stock 116 - - 116 6.03%
Total available
for sale $79,874 $ 795 $ 87 $80,582 5.88%
HELD TO MATURITY
United States Treasury
Within one year $ 6,995 $ 81 $ - $ 7,076 6.56%
One to five years 4,019 76 - 4,095 6.05%
11,014 157 - 11,171 6.38%
Federal agencies
Within one year 2,036 6 - 2,042 5.50%
One to five years 33,350 615 - 33,965 6.14%
35,386 621 - 36,007 6.10%
State, county and municipal
Within one year 1,236 11 - 1,247 9.57%
One to five years 8,430 260 - 8,690 7.69%
Six to ten years 4,582 231 - 4,813 7.56%
14,248 502 - 14,750 7.81%
Total held to maturity $60,648 $1,280 $ - $61,298 6.56%
(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended December 31, 1998, the Bank did not hold any
securities of an issuer that exceeded 10% of stockholders' equity.
13
INVESTMENT SECURITIES, continued
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.
14
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.
15
LOAN PORTFOLIO
CLASSIFICATION OF LOANS
The following is a summary of loans, in thousands of dollars, at December
31, 1998, 1997, 1996, 1995, and 1994 by major classification:
1998 1997 1996 1995 1994
Real estate Loans - mortgage $142,039 $136,441 $111,474 $ 95,451 $ 89,728
- construction 15,560 19,653 15,148 5,453 6,328
Loans to farmers 1,487 1,214 1,328 1,032 1,180
Commercial and industrial loans 36,393 34,606 28,105 23,133 17,472
Loans to individuals for household
family and other consumer
expenditure 32,669 30,772 29,642 28,095 30,700
All other loans, including
overdrafts 1,951 140 236 334 186
Gross Loans 230,099 222,826 185,933 153,498 145,594
Less unearned income (970) (1,105) (1,058) (1,094) (1,231)
Less reserve for loan losses (3,132) (2,879) (2,370) (2,242) (2,220)
Net loans $225,997 $218,842 $182,505 $150,162 $142,143
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The Company's loan portfolio consisted of approximately $178,510 and
$160,088 in fixed rate loans as of December 31, 1998 and 1997, respectively.
At December 31, 1998, and 1997, fixed rate loans with maturities in excess
of one year amounted to approximately $137,928 and $119,218, 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 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
1998, 1997, 1996, 1995, 1994:
December 31,
1998 1997 1996 1995 1994
Nonaccrual loans $ 422 $ 24 $ 377 $ 479 $1,062
Accruing loans which are
contractually past due
90 days or more as to
principal or interest
payments $ 100 $ 135 $ 77 $ 87 $ 55
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, 1998, 1997, and 1996 is as
follows:
1998 1997 1996
Interest included in income during the
year $ 16 $ 1 $ 7
Interest which would have been included
at the original contract rates $ 40 $ 3 $ 45
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, 1998, 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, 1998, the Company had no foreign loans
outstanding.
LOAN CONCENTRATIONS
As of the year ended December 31, 1998, 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, 1998, 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.
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,
1998 1997 1996 1995 1994
Loans (net of unearned income):
Average loans outstanding for
the period $228,057 $204,987 $169,815 $149,940 $140,104
Reserve for loan losses:
Balance at beginning
of period $ 2,879 $ 2,370 $ 2,242 $ 2,220 $ 2,170
Charge-offs:
Commercial, financial, and
agricultural 189 238 111 133 122
Real Estate - construction
and mortgage 14 5 22 3 57
Loans to individuals 553 399 296 313 277
Total charge-offs $ 756 $ 642 $ 429 $ 449 $ 456
Recoveries:
Commercial, financial, and
agricultural 89 100 47 166 58
Real estate-construction
and mortgage 5 106 15 44 35
Loans to individuals 235 145 135 151 118
Total recoveries $ 329 $ 351 $ 197 $ 361 $ 211
Net charge-offs $ 427 $ 291 $ 232 $ 88 $ 245
Additions charged to operations $ 680 $ 800 $ 360 $ 110 $ 295
Balance at end of period $ 3,132 $ 2,879 $ 2,370 $ 2,242 $ 2,220
Ratio of net charge-offs during
the period to average loans
outstanding during the period .19% .14% .14% .06% .17%
[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 $420 during 1999.
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,
1998 1997 1996
Noninterest bearing demand deposits 62,582 57,645 51,249
Interest bearing demand deposits 47,249 45,844 44,886
Savings deposits 28,428 29,894 31,375
Time deposits 197,792 165,271 137,733
Total deposits 336,051 298,654 265,443
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,
1998 1997 1996
Interest bearing demand deposits 1.49% 1.70% 1.70%
Savings deposits 2.69% 2.70% 2.79%
Time deposits 5.04% 5.10% 5.06%
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, 1998:
Time Certificates of Deposit
Maturity within 3 months or less $27,018
Over 3 through 6 months 17,923
Over 6 through 12 months 8,246
Over 12 months 8,141
Total 61,328
20
RETURN ON EQUITY AND ASSETS
The following table presents certain ratios relating to the Company's equity
and assets:
Year ended December 31,
1998 1997 1996
Return on average total assets 1.33% 1.28% 1.19%
Return on average stockholders' equity 13.70% 13.17% 12.15%
Cash dividend payout ratio 37.94% 37.32% 35.09%
Average equity to average assets ratio 9.71% 9.71% 9.83%
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 1998 1997 1996
agreement to repurchase $32,518 $32,366 $33,018
The following information relates to short-term borrowings outstanding
during 1998, 1997, and 1996:
Maximum Amount Weighted Average
Outstanding in Any Interest Rate
Month End at December 31,
1998 1997 1996 1998 1997 1996
Federal funds
purchased and
securities sold
under agreement
to repurchase $39,678 $49,506 $45,333 4.12% 4.61% 4.81%
Year ended December 31,
1998 1997 1996
Federal funds purchased and
securities sold under
agreement to repurchase-
average daily amount outstanding $34,274 $36,148 $39,506
Weighted average interest rate paid 4.42% 4.64% 4.82%
21
ITEM 2. PROPERTIES
The Company's subsidiary, The Conway National Bank, has ten 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) West Conway in Conway (3,286 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 ten
offices, the bank owns the principal office, the office at Red Hill, West
Conway, 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
two future office sites. The sites consist of approximately 1.5 acres on
Highway 17 south of Myrtle Beach in Murrells Inlet and 1.1 acres on Highway
701 north of Conway. An office is scheduled to be constructed and opened on
the Murrells Inlet property during the fourth quarter of 1999. The company
also anticipates building an office on the other site within the next three
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, 1998.
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 12, 1998, at the Annual Meeting of CNB Corporation, the
security holders:
1) Nominated and elected four directors to serve for a three-year
term; and
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,
1998.
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
As of December 31, 1998, there were approximately 670 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.
1998 1997
High Low High Low
First Quarter $90.00 $90.00 $76.80 $76.80
Second Quarter $94.00 $90.00 $84.00 $76.80
Third Quarter $94.00 $94.00 $84.00 $84.00
Fourth Quarter $99.00 $94.00 $90.00 $84.00
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 $3.50 per share in 1998, $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,
1998 1997 1996 1995 1994
Selected Income Statement Data:
Total Interest Income $ 30,043 $ 27,759 $ 24,496 $ 22,601 $ 19,847
Total Interest Expense 13,030 11,764 10,579 10,115 7,613
Net Interest Income 17,013 15,995 13,917 12,486 12,234
Provision for Possible Loan Losses 680 800 360 110 295
Net Interest Income after Provision
for Possible Loan Losses 16,333 15,195 13,557 12,376 11,939
Total Other Operating Income 3,932 3,413 3,015 2,954 2,814
Total Other Operating Expense 11,936 11,041 10,393 9,797 9,599
Income Before Income Taxes 8,329 7,567 6,179 5,533 5,154
Income Taxes 2,821 2,760 2,095 1,777 1,657
Net Income $ 5,508 $ 4,807 $ 4,084 $ 3,756 $ 3,497
Per Share:
Net Income Per Weighted Average
Shares Outstanding* $ 9.22 $ 8.03 $ 6.84 $ 6.29 $ 5.87
Cash Dividend Paid Per Share $ 3.50 $ 3.00 $ 3.00 $ 3.00 $ 2.00
Weighted Average Shares
Outstanding* 597,452 598,435 596,870 597,275 595,463
*Restated for stock dividend
Selected Balance Sheet Data:
Assets $426,359 $381,144 $341,818 $324,694 $297,120
Net Loans 225,997 218,842 182,505 150,162 142,143
Investment Securities 141,230 123,423 132,287 138,768 126,613
Federal Funds Sold 22,100 11,375 - 7,300 3,125
Deposits:
Non-Interest-Bearing $ 66,303 $ 55,422 $ 49,911 $ 44,723 $ 40,986
Interest-Bearing 279,809 245,905 218,502 206,433 193,207
Total Deposits $346,112 $301,327 $268,413 $251,156 $234,193
Stockholders' Equity $ 41,201 $ 37,717 $ 34,496 $ 32,195 $ 28,857
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 19.9% from $184,875 at December 31, 1996 to $221,721 at December
31, 1997; and 3.3% from December 31, 1997 to $229,129 at December 31, 1998.
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 1997 due to a strong local economy but slowed somewhat
in 1998. Loans, net of unearned income, increased as a percentage of total
assets from 54.1% at year-end 1996 to 58.2% at year-end 1997 and decreased
to 53.7% at year-end 1998. Correspondingly, investment securities and
federal funds sold decreased as a percentage of total assets from 38.7% at
year-end 1996 to 35.3% at year-end 1997 and increased to 39.5% at year-end
1998 as investments have been utilized to balance 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 7.2% in 1996 to 6.5% in 1996 as the Bank grew
into its expanded infrastructure but increased to 6.8% in 1998 due to a
branch office addition and $199,000 in Y-2K related hardware and software
purchases. 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 competitive
rates. Non-interest-bearing demand deposits remained flat at 14.6% at
December 31, 1996 and 14.5% at December 31, 1997 but grew to 15.6% at
December 31, 1998. 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 74.3% at December 31, 1996 and 1997 to 73.5% at December 31,
1998.
The following table sets forth the percentage relationship to total assets
of significant components of the Company's balance sheet as of December 31,
1998, 1997 and 1996:
December 31,
1998 1997 1996
Assets:
Earning assets
Loans, net of unearned income 53.7% 58.2% 54.1%
Investment securities:
Taxable 29.8 28.6 34.6
Tax-exempt 3.3 3.7 4.1
Federal funds sold and securities
purchased under agreement to resell 6.4 3.0 -
Other earning assets - - -
Total earning assets 93.2 93.5 92.8
Other assets 6.8 6.5 7.2
Total assets 100.0% 100.0% 100.0%
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits 65.6% 64.5% 63.9%
Federal funds purchased and securities
sold under agreement to repurchase 7.6 8.5 9.7
Other short-term borrowings .3 1.3 .7
Total interest-bearing liabilities 73.5 74.3 74.3
Non-interest-bearing deposits 15.6 14.5 14.6
Other liabilities 1.2 1.3 1.0
Stockholders' equity 9.7 9.9 10.1
Total liabilities and stockholders' equity 100.0% 100.0% 100.0%
25
Results of Operation
CNB Corporation and subsidiary experienced earnings in 1998, 1997 and 1996
of $5,508, $4,807,and $4,084, respectively, resulting in a return of average
assets of 1.33%, 1.28%, and 1.19% and a return on average stockholders'
equity of 13.70%, 13.17% and 12.15%. 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 $426,359 at December 31, 1998 as compared to $381,144 at
December 31, 1997 and $341,818 at December 31, 1996. The following table
sets forth the financial highlights for fiscal years 1998, 1997, and 1996.
26
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
December 31, 1997 to 1998 December 31, 1996 to 1997 December 31,
1998 Percent 1997 Percent 1996
Increase Increase
(Decrease) (Decrease)
Net interest income after
provision for loan losses $ 16,333 7.5% $ 15,195 12.1% $ 13,557
Income before income taxes 8,329 10.1 7,567 22.5 6,179
Net Income 5,508 14.6 4,807 17.7 4,084
Per share (weighted average
of shares outstanding)* $ 9.22 14.8 $ 8.03 17.4 $ 6.84
Cash dividends declared 2,090 16.5 1,794 25.2 1,433
Per Share $ 3.50 16.7 $ 3.00 - $ 3.00
Total assets $426,359 11.9% $381,144 11.5% $341,818
Total deposits 346,112 14.9 301,327 12.3 268,413
Loans, net of unearned income 229,129 3.3 221,721 19.9 184,875
Investment securities 141,230 14.4 123,423 (6.7) 132,287
Stockholders' equity 41,201 9.2 37,717 9.3 34,496
Book value per share*
(actual number of shares
outstanding) $ 69.06 9.5 $ 63.06 9.2 $ 57.73
*Restated for stock dividend
Ratios(1):
Returns on average total assets 1.33% 3.9 1.28% 7.6 1.19%
Return on average stockholders'
equity 13.70% 4.0 13.17% 8.4 12.15%
(1) For the fiscal years ended December 31, 1998, 1997, and 1996, average total
assets amounted to $413,878, $375,989, and $342,182 with average stockholders'
equity totaling $40,198,$36,495, and $33,620, respectively.
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 1998, 1997 and 1996
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 $14,298 in 1996
and $16,363 in 1997 to $17,371 in 1998. During the three-year period,
total fully-tax-equivalent interest income increased by 13.1% from $24,877
in 1996 to $28,127 in 1997 and increased 8.1% in 1998 to $30,401. Over the
same period, total interest expense increased by 11.2% from $10,579 in 1996
to $11,764 in 1997 and increased 10.8% to $13,030 in 1998.
Fully-tax-equivalent net interest income as a percentage of average total
earning assets increased from 4.5% in 1996 to 4.7% in 1997 and decreased
back to 4.5% in 1998. The increase was reflective of strong loan growth and
higher loan to deposit ratios.
Interest rates paid on deposits and borrowed funds and earned on loans and
investments have generally followed the fluctuations in market interest
rates in 1998, 1997, and 1996. However, fluctuations in market interest
rates do not necessarily have a significant impact on net interest income,
depending on the Bank's rate sensitivity position. A rate sensitive asset
(RSA) is any loan or investment that can be repriced 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 static gap 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
1 Day 90 Days 180 Days 365 Days 5 Years 5 Years
Rate Sensitive Assets (RSA)
Federal Funds Sold 27,100 0 0 0 0 0
Investment Securities 0 5,885 6,230 11,754 112,856 4,389
Loans (net of non-accruals $422) 51,589 17,340 11,354 11,465 98,042 39,886
Total, RSA 78,689 23,225 17,584 23,219 210,898 44,275
Rate Sensitive Liabilities (RSL)
Deposits:
Certificates of Deposit of 0 27,018 17,923 8,246 8,141 0
$100,000 or more
All Other Time Deposits 0 40,559 28,490 26,898 11,505 0
Money Market Deposit Accounts 32,713 0 0 0 0 0
Federal Funds Purchased and 30,428 90 0 0 2,000 0
Securities Sold Under
Repurchase Agreements
Total RSL 63,141 67,667 46,413 35,144 21,646 0
RSA-RSL 15,548 (44,442) (28,829) (11,925) 189,252 44,275
Cumulative RSA-RSL 15,548 (28,894) (57,723) (69,648) 119,604 163,879
Cumulative RSA/RSL 1.25 .78 .67 .67 1.51 1.70
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 $680 in 1998, $800 in 1997 and $360 in 1996. Net loan
charge-offs totalled $427 in 1998, $291 in 1997, and $232 in 1996 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 1.39%
at December 31, 1998, 1.32% at December 31, 1997, and 1.30% at December 31,
1996.
Securities Transactions - Net unrealized gains/(losses) in the investment
securities portfolio were $1,358 at December 31, 1998, $983 at December 31,
1997, and $202 at December 31, 1996. The market value of investment
securities rose in 1996, 1997, and 1998 as overall market rates declined.
Security gains/(losses) of $(28) and $41 were taken in 1997 and 1996,
respectively, when bonds were sold to provide additional primary liquidity
and to manage the bank's interest rate sensitivity position. No security
gains/(losses) were taken in 1998.
Other Income - Other income, net of security sales, increased by 15.7%
from $2,974 in 1996 to $3,441 in 1997 and grew 14.3% from $3,441 in 1997 to
$3,932 in 1998. Other income rose in 1996 due to higher volumes in deposit
and loan account activity and rose significantly in 1997 and 1998 due to
continued growth in these areas compounded by a June 1, 1997 increase in
overall service charge rates. Also, 1998 other income was enhanced by the
start-up of an in-house mortgage loan department dedicated to the
origination of mortgage loans for the secondary market.
Other Expenses - Other expenses increased by 6.2% from $10,393 in 1996
to $11,041 in 1997 and 8.1% from $11,041 in 1997 to $11,936 in 1998. The
components of other expenses are salaries and employee benefits of $6,166,
$6,591, and $7,259; occupancy and furniture and equipment expenses of
$1,759, $1,698, and $1,704; and other operating expenses of $2,468, $2,752,
and $2,973 for 1996, 1997, and 1998, respectively. The increase in
salaries and employee benefits reflects compensation increments, the
increased costs of providing employee benefits, and an increase from 180 to
198 full-time equivalent employees over the three-year period. The addition
of the Myrtle Beach office in 1995 and the West Conway office in 1998
impacted occupancy and furniture and equipment expense. Also, approximately
$106 of the budgeted "Year 2000" costs (see Year 2000) of $276 were expensed
during 1998. Looking ahead, non-interest expense should grow due to a
planned addition of an office to the bank's branch network during the fourth
quarter of 1999 and the remaining "Year 2000" expenditures.
Income Taxes - Provisions for income taxes increased 31.7% from $2,095
in 1996 to $2,760 in 1997 and 2.2% from $2,760 in 1997 to $2,821 in 1998.
The increase in income taxes is primarily due to an increase in income
before income taxes of 22.5% from $6,179 in 1996 to $7,567 in 1997 and 10.1%
from $7,567 in 1997 to $8,329 in 1998. Also, the utilization of tax-free
income as a percentage of income before income taxes declined in 1997 and
1998.
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
$4,467, $3,480, and $3,078 at December 31, 1998, 1997, and 1996 with
liabilities, consisting of cash dividends payable, totalling $2,090, $1,794,
and $1,435, respectively. In anticipation of potential "Year 2000" liquidity
needs, the bank is in the process of joining the Federal Home Loan Bank system
and obtaining additional borrowing capacity, as well as increasing short-term
assets that may be easily converted to cash. Management feels that liquidity
sources are more than adequate to meet funding needs.
CAPITAL RESOURCES
Total stockholders' equity was $41,201, $37,717, and $34,496 at December 31,
1998, 1997, and 1996, representing 9.66%, 9.90%, and 10.09% of total assets,
respectively. At December 31, 1998, 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 1996, 1997, and 1998, and should favorably impact future years
income. 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. The adoption of SFAS 130 had no effect
on the Company's net income or stockholders' equity.
In June, 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes standards for
the way public enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 becomes effective for financial statements for periods
beginning after December 15, 1997, and requires that comparative information
from earlier years be restated to conform to its requirements. The adoption
of the provisions of SFAS 131 is not expected to have a material impact on the
Company.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instrument
and Hedging Activities." All derivatives are to be measured at fair value and
recognized in the balance sheet as assets or liabilities. The statement is
effective for fiscal years and quarters beginning after June 15, 1999. Because
the Company does not use derivative transactions at this time, management
does not expect that this standard will 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. Anticipated Year 2000 costs are projected to be approximately
$276,000. The majority of this amount has been spent on capital expenditures to
be expensed over the next four years. $20,000 will be spent this year on
public information and education.
All mission critical systems have been replaced or upgraded to Year 2000
compliance. All mission critical systems have been tested to ensure Year 2000
functionality. Further testing will be conducted during 1999 as deemed
appropriate. The bank has in place a Business Interruption Plan in case of
unforeseen problems or failures.
In June of this year, The Conway National Bank and The Conway Chamber of
Commerce will jointly sponsor a Year 2000 Community Forum. Participants will
include local utilities, city and county governments, social security, health
services, the post office and educational institutions. The public will have an
opportunity to hear progress reports on participants' Year 2000 projects.
The bank is currently working on its Year 2000 Contingency Plan for cash
services. This plan will anticipate and provide for the increased demand for
extra cash by customers as we approach year end.
31
ITEM 8 - FINANCIAL STATEMENTS
CNB CORPORATION AND SUBSIDIARY
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
-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 comprehensive income 38
Consolidated statements of cash flows 39
NOTES TO FINANCIAL STATEMENTS 40 - 55
-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
AUGUSTA, GA
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, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, comprehensive income
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ELLIOTT, DAVIS & COMPANY, LLP
January 28, 1999
Internationally - Moore Stephens Elliott Davis, LLC
870 S. Pleasantburg Drive Post Office Box 6286 Greenville, South Carolina
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,
1998 1997
ASSETS
CASH AND DUE FROM BANKS $ 17,864 $ 14,371
FEDERAL FUNDS SOLD 27,100 11,375
INVESTMENT SECURITIES HELD TO MATURITY
(fair value $61,928 in 1998 and $70,893 in 1997) 60,648 70,239
INVESTMENT SECURITIES AVAILABLE FOR SALE 80,582 53,184
LOANS 230,099 222,826
Less unearned income (970) (1,105)
Less allowance for loan losses (3,132) (2,879)
Net loans 225,997 218,842
PREMISES AND EQUIPMENT 7,258 6,798
ACCRUED INTEREST RECEIVABLE 4,102 3,680
OTHER ASSETS 2,808 2,655
$ 426,359 $ 381,144
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing $ 66,303 $ 55,422
Interest-bearing 279,809 245,905
Total deposits 346,112 301,327
Securities sold under repurchase agreements 32,518 32,366
United States Treasury demand notes 1,148 5,000
Other liabilities 5,380 4,734
Total liabilities 385,158 343,427
COMMITMENTS AND CONTINGENT LIABILITIES - Notes 10, 11 and 12
STOCKHOLDERS' EQUITY
Common stock - $10 par value; authorized 1,500,000 shares in 1998 and1997;
issued 598,681 shares in 1998 and 1997 5,987 5,987
Capital in excess of par value of stock 24,538 24,552
Retained earnings 10,448 7,030
Accumulated other comprehensive income 425 197
41,398 37,766
Less 2,066 shares and 539 shares held in Treasury at cost (197) (49)
Total stockholders' equity 41,201 37,717
$ 426,359 $ 381,144
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,
1998 1997 1996
INTEREST INCOME
Loans and fees on loans $ 20,755 $ 19,110 $ 15,808
Investment securities
Taxable 7,187 7,191 7,488
Nontaxable 695 715 740
Total interest on investment securities 7,882 7,906 8,228
Federal funds sold 1,406 743 460
Total interest income 30,043 27,759 24,496
INTEREST EXPENSE
Deposits 11,432 10,009 8,610
Securities sold under repurchase agreements 1,514 1,676 1,906
United States Treasury demand notes 84 79 63
Total interest expense 13,030 11,764 10,579
Net interest income 17,013 15,995 13,917
PROVISION FOR LOAN LOSSES 680 800 360
Net interest income after provision for loan lNONINTEREST INCOME
Service charges on deposit accounts 2,449 2,246 1,956
Other service and exchange charges 1,483 1,195 1,018
Gain (loss) on sale of investment securities available for sale - (28) 41
Total noninterest income 3,932 3,413 3,015
NONINTEREST EXPENSES
Salaries and wages 5,857 5,328 5,031
Pensions and other employee benefits 1,402 1,263 1,135
Occupancy 690 670 719
Furniture and equipment 1,014 1,028 1,040
Liability insurance 103 105 79
Office supplies 407 366 290
Credit card operations 737 624 569
Other operating expenses 1,726 1,657 1,530
Total noninterest expenses 11,936 11,041 10,393
Income before provision for income taxes 8,329 7,567 6,179
PROVISION FOR INCOME TAXES 2,821 2,760 2,095
Net income $ 5,508 $ 4,807 $ 4,084
NET INCOME PER SHARE OF COMMON STOCK $ 9.22 $ 8.03 $ 6.84
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, 1998, 1997 and 1996
(amounts, except share data, in thousands)
Capital in Accumulated
excess of other Total
Common par value Retained Treasury comprehensive stockholders'
Shares stock of stock earnings stock income equity
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 479,093 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 $114 - - - - - 170 170
BALANCE, DECEMBER 31, 1997 598,681 5,987 24,552 7,030 (49) 197 37,717
1998
Net income - - - 5,508 - - 5,508
Cash dividend, $3.50 per share - - - (2,090) - - (2,090)
Treasury stock transactions (net) - - - - (148) - (148)
Gain on sale of treasury stock - - 6 - - - 6
Minority interest purchase premium - - (20) - - - (20)
Net change in unrealized holding gain,
net of income taxes of $152 - - - - - 228 228
BALANCE, DECEMBER 31, 1998 598,681 $ 5,987 $ 24,538 $ 10,448 $ (197) $ 425 $ 41,201
The accompanying notes are an integral part of these consolidated financial
statements.
-37-
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
For the years ended December 31,
1998 1997 1996
NET INCOME $ 5,508 $ 4,807 $ 4,084
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding (losses) gains on investment
securities available for sale 228 198 (444)
Reclassification adjustments for losses
(gains) included in net income - (28) 41
COMPREHENSIVE INCOME $ 5,736 $ 4,977 $ 3,681
-38-
CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
For the years ended December 31,
1998 1997 1996
OPERATING ACTIVITIES
Net income $ 5,508 $ 4,807 $ 4,084
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 693 700 757
Provision for loan losses 680 800 360
Provision for deferred income taxes (272) 50 89
Loss on disposal of equipment 78 51 -
Changes in assets and liabilities:
Increase in accrued interest receivable (422) (355) (38)
Increase in other assets (153) (170) (79)
Increase in other liabilities 767 998 108
Net cash provided by operating activities 6,879 6,881 5,281
INVESTING ACTIVITIES
Proceeds from sale of investment securities available for sale - 4,707 3,932
Proceeds from maturities of investment securities held to maturity 22,676 17,776 19,670
Proceeds from maturities of investment securities available for sale 17,474 18,832 11,546
Purchases of investment securities available for sale (44,493) (14,301) (15,921)
Purchases of investment securities held to maturity (13,085) (17,866) (13,418)
Net (increase) decrease in federal funds sold (15,725) (11,375) 7,300
Net increase in loans (7,835) (37,137) (32,702)
Premises and equipment expenditures (1,231) (683) (457)
Net cash used for investing activities (42,219) (40,047) (20,050)
FINANCING ACTIVITIES
Dividends paid (2,090) (1,794) (1,432)
Net increase in deposits 44,785 32,914 17,257
Increase (decrease) in securities sold under repurchase agreements 152 3,348 (7,917)
Increase (decrease) in federal funds purchased - (4,000) 4,000
Increase (decrease) in United States Treasury demand notes (3,852) 2,681 1,553
Treasury stock transactions (net) (162) 57 53
Cash in lieu of fractional shares on stock dividend - (19) -
Net cash provided by financing activities 38,833 33,187 13,514
Net increase (decrease) in cash and due from banks 3,493 21 (1,255)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 14,371 14,350 15,605
CASH AND DUE FROM BANKS, END OF YEAR $ 17,864 $ 14,371 $ 14,350
CASH PAID FOR
Interest $ 12,744 $ 11,233 $ 10,580
Income taxes $ 2,935 $ 2,665 $ 1,915
The accompanying notes are an integral part of these consolidated financial
statements.
-39-
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 wholly-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 (accumulated other comprehensive income) 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.
(Continued)
-40-
NOTE 1 - SUMMARY OF S, 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, 1998
and 1997, 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 the straight-line method. 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.
(Continued)
-41-
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 $295,000, $338,000 and $294,000 were included
in the Company's results of operations for 1998, 1997 and 1996, 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 statement 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 assets will not be realized.
Net income per share
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings Per Share." Net income per share is computed on the basis of the
weighted average number of common shares outstanding, 597,452 in 1998, 598,435
in 1997, and 596,870 in 1996. 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
SFAS 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 Company 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.
Investment securities held to maturity and available for sale - Fair values
for investment securities are based on quoted market prices.
(Continued)
-42-
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Fair values of financial instruments
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.
Comprehensive income
In June 1997, the Financial Accounting Standards Board (FSAB) issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Under this statement, the
Company is required to classify items of "other comprehensive income" by
their nature in the financial statements. Statement 130 is effective for
both interim and annual periods beginning after December 15, 1997.
Comparative financial statements provided for earlier periods were required
to be reclassified to reflect the provisions of the statement. The adoption
of SFAS 130 had no effect on the Company's net income or stockholders'
equity.
Recently issued accounting standards
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS 131 requires that a
public enterprise report a measure of segment profit or loss, certain
specific revenue and expense items, segment assets, information about the way
that the operating segments were determined and other items. The Statement
is effective for fiscal years beginning after December 15, 1997. Management
does not anticipate that adoption of SFAS 131 will have a material effect on
the Company's financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instrument
and Hedging Activities." All derivatives are to be measured at fair value
and recognized in the balance sheet as assets or liabilities. The statement
is effective for fiscal years and quarters beginning after June 15, 1999.
Because the Company does not use derivative transactions at this time,
management does not expect that this standard will have a significant effect
on the Company.
-43-
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, 1998 and 1997 were
approximately $6,839,000 and $5,909,000, respectively.
NOTE 3 - INVESTMENT SECURITIES
The book value and approximate fair value of investment securities are
summarized as follows (amounts in thousands):
December 31, 1998
Amortized Unrealized Holding Fair
cost Gains Losses value
AVAILABLE FOR SALE
United States Treasury
Within one year $ 8,011 $ 59 $ - $ 8,070
One to five years 5,962 179 - 6,141
13,973 238 - 14,211
Federal agencies
Within one year 5,171 30 - 5,201
One to five years 60,289 520 87 60,722
65,460 550 87 65,923
State, county and municipal
Within one year 325 7 - 332
Other - restricted
Federal Reserve Bank stock 116 - - 116
Total available for sale $ 79,874 $ 795 $ 87 $ 80,582
HELD TO MATURITY
United States Treasury
Within one year $ 6,995 $ 81 $ - $ 7,076
One to five years 4,019 76 - 4,095
11,014 157 - 11,171
Federal agencies
Within one year 2,036 6 - 2,042
One to five years 33,350 615 - 33,965
35,386 621 - 36,007
State, county and municipal
Within one year 1,236 11 - 1,247
One to five years 8,430 260 - 8,690
Six to ten years 4,582 231 - 4,813
14,248 502 - 14,750
Total held to maturity $ 60,648 $ 1,280 $ - $ 61,298
(Continued)
-44-
NOTE 3 - INVESTMENT SECURITIES, Continued
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
December 31, 1997
Amortized Unrealized Holding Fair
cost Gains Losses value
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
Investment securities with an aggregate par value of $74,500,000 at December
31, 1998 and $69,965,000 at December 31, 1997 were pledged to secure public
deposits and for other purposes.
-45-
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Following is a summary of loans by major classification (tabular amounts in
thousands):
December 31,
1998 1997
Real estate - mortgage $ 142,039 $ 136,441
Real estate - construction 15,560 19,653
Commercial and industrial 36,393 34,606
Loans to individuals for household, family and
other consumer expenditures 32,669 30,772
Agriculture 1,487 1,214
All other loans, including overdrafts 1,951 140
$ 230,099 $ 222,826
The Bank's loan portfolio consisted of $178,510,000 and $160,088,000 in fixed
rate loans as of December 31, 1998 and 1997, respectively. At December 31,
1998, fixed rate loans with maturities in excess of one year amounted to
$137,928,000.
Changes in the allowance for loan losses are summarized as follows (tabular
amounts in thousands):
1998 1997 1996
Balance, beginning of year $ 2,879 $ 2,370 $ 2,242
Recoveries of loans previously charged
against the allowance 329 351 197
Provided from current year's income 680 800 360
Loans charged against the allowance (756) (642) (429)
Balance, end of year $ 3,132 $ 2,879 $ 2,370
At December 31, 1998 and 1997, non-accrual loans totaled $422,000 and $24,000,
respectively. The total amount of interest earned on non-accrual loans was
$16,000 in 1998, $1,000 in 1997, and $7,000 in 1996. The gross interest
income which would have been recorded under the original terms of the
non-accrual loans amounted to $40,000 in 1998, $3,000 in 1997, and $45,000 in
1996. As of December 31, 1998 and 1997, the Company had no impaired loans.
-46-
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 is summarized as follows (tabular
amounts in thousands):
1998 1997
Land and buildings $ 9,581 $ 8,853
Furniture, fixtures and equipment 5,188 5,313
14,769 14,166
Less accumulated depreciation and amortization 7,530 7,370
7,239 6,796
Construction in progress 19 2
$ 7,258 $ 6,798
Depreciation and amortization of premises and equipment charged to operating
expense totaled $693,000 in 1998, $700,000 in 1997, and $757,000 in 1996.
NOTE 6 - DEPOSITS
At December 31, 1998 and 1997, certificates of deposit of $100,000 or more
totaled $61,328,000 and $56,305,000, respectively. Interest expense on these
deposits was $3,455,000 in 1998, $2,815,000 in 1997, and $1,639,000 in 1996.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are summarized as follows (amounts
in thousands):
December 31,
1998 1997
U. S. Government securities with a book value of $35,127
($35,672 fair value) and $38,984 ($39,216 fair value)
at December 31, 1998 and 1997, respectively, are used as
collateral for the agreements. $ 32,518 $ 32,366
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 4.12 and
4.61 percent at December 31, 1998 and 1997, respectively. Securities sold under
repurchase agreements averaged $34,274,000 and $35,815,000 during 1998 and 1997,
respectively. The maximum amounts outstanding at any month-end were $39,678,000
and $49,506,000 during 1998 and 1997, respectively.
-47-
NOTE 8 - LINES OF CREDIT
At December 31, 1998, the Bank had unused short-term lines of credit totaling
$23,000,000 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 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 $7,000,000
under the arrangement at an interest rate of 4.11%. The note is secured by
U.S. Treasury Notes with a market value of $7,530,000 at December 31, 1998. The
amount outstanding under the note totaled $1,148,000 and $5,000,000 at December
31, 1998 and 1997, 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):
1998 1997 1996
Amount % Amount % Amount %
Tax expense at statutory rate $ 2,832 34.0% $ 2,573 34.0% $ 2,101 34.0%
Increase (decrease) in taxes resulting from:
Tax exempt interest (213) (2.6) (219) (2.9) (253) (4.1)
State bank tax (net of federal benefit) 166 2.0 132 1.8 121 2.0
Other - net 36 0.5 274 3.6 126 2.0
Tax provision $ 2,821 33.9% $ 2,760 36.5% $ 2,095 33.9%
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,
1998 1997
Deferred tax assets:
Allowance for loan losses deferred for tax purposes $ 1,065 $ 979
Other 125 28
Gross deferred tax assets 1,190 1,007
Less valuation allowance 1,072 1,007
Net deferred tax assets 118 -
Deferred tax liabilities:
Unrealized net gains on securities available for sale (283) (132)
Accumulated discount accretion - (125)
Depreciation for income tax reporting in excess of amount
for financial reporting (312) (330)
Other - (31)
Gross deferred tax liabilities
(595) (618)
Net deferred tax liability $ (477) $ (618)
(Continued)
-48-
NOTE 9 - INCOME TAXES, Continued
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
1998 deferred tax provision of $151,000 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):
1998 1997 1996
Income taxes currently payable
Federal $ 2,864 $ 2,487 $ 1,828
State 249 223 178
3,113 2,710 2,006
Tax consequences of differences
Loan losses (86) (173) (43)
Depreciation (18) (15) 39
Accretion on investments (125) 22 20
Other (63) 216 73
Provision $ 2,821 $ 2,760 $ 2,095
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 Bank's off balance sheet financial instruments is as
follows as of December 31, 1998 (amounts in thousands):
Contract
amount
Commitments to extend credit $ 20,637
Standby letters of credit $ 710
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.
-49-
NOTE 11 - COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Bank was obligated under a number of non-cancelable
operating leases on land used for branch offices and a computer maintenance
contract that had initial or remaining terms of more than one year. Future
minimum payments under these agreements at December 31, 1998 were (tabular
amounts in thousands):
Payable in year ending Amount
1999 $ 93
2000 77
2001 7
2002 5
2003 and thereafter 25
Total future minimum payments required $ 207
Lease payments under all operating leases charged to expense totaled $56,000
in 1998, $62,000 in 1997, and $61,000 in 1996. 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 Company's financial position.
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, 1998 the Bank's
retained earnings were $34,247,000.
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, 1998 and 1997, were $1,085,000 and $1,628,000,
respectively. During 1998, $55,000 of new loans were made to this group and
repayments of $598,000 were received.
-50-
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, 1998, 1997 and
1996, $378,000, $361,000, and $336,000, 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, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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 Bank'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, 1998
Total Capital (to risk
weighted assets) $ 41,177 16.82% $ 19,586 8.0% $ 24,483 10.0 %
Tier I Capital (to risk
weighted assets) 38,117 15.57 9,793 4.0 14,690 6.0
Tier I Capital (to average assets) 38,117 9.22 16,541 4.0 20,677 5.0
-51- (Continued)
NOTE 15 - REGULATORY MATTERS, Continued
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
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):
1998 1997
Carrying Fair Carrying Fair
amount value amount value
FINANCIAL ASSETS
Cash and due from banks $ 17,864 $ 17,864 $ 14,371 $ 14,371
Federal funds sold 27,100 27,100 11,375 11,375
Investment securities held to maturity 60,648 61,928 70,239 70,893
Investment securities available for sale 80,582 80,582 53,184 53,184
Loans 230,099 227,831 222,826 219,546
FINANCIAL LIABILITIES
Deposits 346,112 346,460 301,327 301,490
Securities sold under repurchase agreements 32,518 32,602 32,366 32,420
U. S. Treasury demand notes 1,148 1,148 5,000 5,000
OFF BALANCE SHEET INSTRUMENTS
Commitments to extend credit 20,637 20,637 20,551 20,551
Standby letters of credit 710 710 1,438 1,438
-52-
NOTE 17 - PARENT COMPANY INFORMATION
Following is condensed financial information of CNB Corporation (parent
company only) (amounts in thousands):
CONDENSED BALANCE SHEETS
December 31,
1998 1997
ASSETS
Cash $ 4,467 $ 3,480
Investment in subsidiary 38,542 35,646
Land 245 348
Other assets 37 37
$ 43,291 $ 39,511
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 2,090 $ 1,794
Stockholders' equity (net of $197 and $49 of treasury stock) 41,201 37,717
$ 43,291 $ 39,511
CONDENSED STATEMENTS OF INCOME
For the years ended December 31,
1998 1997 1996
INCOME
Dividend from bank subsidiary $ 2,903 $ 1,934 $ 1,548
Other income - - 11
2,903 1,934 1,559
EXPENSES
Sundry 38 34 30
Income before equity in undistributed
net income of bank subsidiary 2,865 1,900 1,529
EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARY 2,643 2,904 2,555
Net income $ 5,508 $ 4,804 $ 4,084
-53- (Continued)
NOTE 17 - PARENT COMPANY INFORMATION, Continued
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
OPERATING ACTIVITIES
Net income $ 5,508 $ 4,804 $ 4,084
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in undistributed net income of bank subsidiary (2,643) (2,904) (2,555)
Net cash provided by operating activities 2,865 1,900 1,529
INVESTING ACTIVITIES
Purchase of land (122) (103) -
Proceeds from the sale of land 200 - -
Net cash provided by (used for) investing activities 78 (103) -
FINANCING ACTIVITIES
Dividends paid (1,794) (1,433) (1,431)
Cash in lieu of fractional shares on stock dividend - (19) -
Treasury stock transactions (net) (162) 57 53
Net cash provided by (used for) financing activities (1,956) (1,395) (1,378)
Net increase in cash 987 402 151
CASH, BEGINNING OF YEAR 3,480 3,078 2,927
CASH, END OF YEAR $ 4,467 $ 3,480 $ 3,078
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited condensed financial data by quarter for 1998 and 1997 is as
follows (amounts, except per share data, in thousands):
Quarter ended
1998 March 31 June 30 Sept. 30 Dec. 31
Interest income $ 7,187 $ 7,554 $ 7,737 $ 7,565
Interest expense 3,166 3,282 3,324 3,258
Net interest income 4,021 4,272 4,413 4,307
Provision for loan losses 190 175 160 155
Net interest income after
provision for loan losses 3,831 4,097 4,253 4,152
Noninterest income 816 963 1,161 992
Noninterest expenses 2,754 2,758 2,906 3,518
Income before income taxes 1,893 2,302 2,508 1,626
Income taxes 657 756 821 587
Net income $ 1,236 $ 1,546 $ 1,687 $ 1,039
Net income per share $ 2.07 $ 2.58 $ 2.83 $ 1.74
Weighted average shares outstanding 598,098 597,768 597,258 596,684
-54- (Continued)
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED), Continued
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
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-55-
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
(71) 1958 2000 Chairman of the Board. 31,150(1) 5.22
The President of the
Bank from November
1985 to February 1988.
W. Jennings Duncan
(43) 1984 2001 President. Executive 19,342(2) 3.24
Vice President of the
Bank from November
1985 to February 1988.
Dr. R. C. Smith
(84) 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.
(53) 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.
56
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.
(69) 1963 2002 Retired in 1995 as 20,403(4) 3.42
President of Dargan
Construction Company,
Inc.
*Charles C. Cutts 1945 2002 Retired. 15,367(5) 2.58
(93)
Paul R. Dusenbury 1997 2000 Treasurer. Vice 836(6) .14
(40) President and Cashier
of the Bank since 1988.
*G. Heyward Goldfinch
(80) 1976 2002 Retired. Director 1,937 .32
of Goldfinch's, Inc.,
a funeral home, and of
Hillcrest Cemetery of
Conway, Incorporated.
John Monroe J. Holliday
(82) 1969 2000 President of Palmetto 15,025(7) 2.52
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 2002 Executive Vice 1,774(8) .30
(53) President. Served as
Vice President and
Cashier of the Bank
from 1985 to 1988.
Richard M. Lovelace,Jr.
(52) 1984 2000 Attorney in private 1,912(9) .32
practice with Lovelace
& Rogers, PA in Conway,
South Carolina.
John K. Massey
(84) 1959 2001 Retired. 4,722(10) .79
*Howard B. Smith, III
(50) 1993 2002 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.
57
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 (42 persons), own 155,938 (26.14%) shares of
Company stock.
(1) Includes 10,517 shares held by Harriette B. Duncan (wife).
(2) Includes 871 shares held by Robin F. Duncan (wife); 2,510 shares
held by Ann Louise Duncan (daughter); 2,510 shares held by Mary Kathryn
Duncan (daughter); 2,510 shares by Willis Jennings Duncan, V (son); and
2,510 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 7,703 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.
58
The Board of Directors of the Company, as originally constituted, was
classified into three (3) classes with each class consisting of five (5)
directors. Five (5) directors in Class II will be elected at the 1999
Annual Meeting to serve for a three (3) year term. Directors in Class III
will be elected at the 2000 Annual Meeting to serve for a three (3) year
term and Directors in Class I will be elected at the 2001 Annual Meeting to
serve for a three (3) year term. Currently, there are thirteen (13)
Directors, with five (5) directors in Class II. 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.
59
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 1998, the Company's Board of Directors met four (4) times; the
Bank's Board of Directors met twelve (12) times; the Executive Committee met
eleven (11) times; the Audit Committee met nine (9) times; the Loan
Committee met twelve (12) times; the Building Committee met two (2) times;
and the Public Relations Committee did not meet. With the exception of
Charles C. Cutts, 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 71 Chairman of the Board (1)
W. Jennings Duncan 43 President and Director (1)
Robert P. Hucks 53 Executive Vice President and
Director (1)
Verta Lee Chestnut 60 Secretary
Paul R. Dusenbury 40 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.
60
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 1998, 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 1998 135,504 29,900 4,361 0 0 0 10,163
President and 1997 128,136 25,000 3,386 0 0 0 9,610
Director of Bank 1996 121,740 15,640 2,985 0 0 0 9,131
Robert P. Hucks 1998 119,796 26,500 6,000 0 0 0 8,985
Executive Vice 1997 113,280 22,188 6,000 0 0 0 8,496
President and 1996 107,628 13,960 6,000 0 0 0 8,072
Director of Bank
Paul R. Dusenbury 1998 111,060 24,588 6,000 0 0 0 8,330
Vice President and 1997 105,024 20,688 6,000 0 0 0 7,877
Cashier of Bank 1996 99,780 13,000 6,000 0 0 0 7,484
(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.
61
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, 1998, 1997, and 1996, $378,000, $361,000, and
$336,000, 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.
62
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 $400 for each monthly
meeting of the Board of Directors and an additional $100 for each committee
meeting attended in 1998. Effective February, 1999, Director compensation
for each committee meeting attended was increased to $150.
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, 1998, all Section 16(a)
filing requirements applicable to its officers, directors, and 10 percent
shareholders were complied with.
63
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of December 31, 1998, 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 31,150 5.2%
1400 Third Avenue
Conway, South Carolina 29526
All Officers and Directors as a Group
(41 persons) (2) 155,938 26.1%
_________________
(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 28 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.
64
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, 1998 and 1997
Consolidated Statements of Income - Years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows - Years Ended December 31,
1998, 1997, and 1996
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 8-A dated June 24, 1998
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 67 and 68).
All other exhibits, the filing of which are required with this
Form, are not applicable.
65
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 17, 1999.
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)
Harold G. Cushman, Jr. Director
Charles C. Cutts Director
G. Heyward Goldfinch Director
J.M.J. Holliday Director
John K. Massey Director
Howard B. Smith, III Director
66