For the quarterly period ended June 30,
2004
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
___________________
Commission file number: 2-96350
CNB
Corporation
(Exact
name of registrant as specified in its charter)
South
Carolina 57-0792402
(State or other jurisdiction of (I.R.S.
Employer
incorporation or
organization) Identification
No.)
P.O. Box 320, Conway, South
Carolina 29528
(Address of principal executive
offices) (Zip Code)
(Registrant's telephone number, including area code): (803)
248-5721
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act). Yes____. No X .
State the number of shares outstanding of the issuers shares of common equity as of the latest practical date: 717,363 shares of common stock, par value $10 per share, July 31, 2004.
CNB Corporation
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PART I. |
FINANCIAL
INFORMATION |
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Forward-Looking Statements
Statements included in this report which are not historical in nature are intended to be, and are hereby identified as "forward-looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Such forward-looking statements may be identified, without limitation, by the use of the words "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. The Company's expectations, beliefs, estimates and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs, estimates or projections will result or be achieved or accomplished.
The Company cautions readers that forward-looking statements, including without limitation, those relating to the Company's recent and continuing expansion, its future business prospects, revenues, working capital, liquidity, capital needs, interest costs, income, and adequacy of the allowance for loan losses, are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Part I.
Item 1. Financial Statements
CNB Corporation and Subsidiary
Consolidated Balance Sheets
(All Dollar Amounts, Except Per Share Data, in Thousands)
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ASSETS: |
June 30, |
December 31, |
June 30, |
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CNB Corporation and Subsidiary
Consolidated Statement of Income
(All Dollar Amounts, Except Per Share Data, in Thousands)
(Unaudited)
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Three Months Ended |
Six Months Ended |
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2004 |
2003 |
2004 |
2003 |
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CNB Corporation and Subsidiary
Consolidated Statement of Comprehensive Income
(All Dollar Amounts, Except Per Share Data,
in Thousands)
(Unaudited)
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Six Months |
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2004 |
2003 |
2004 |
2003 |
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Other
comprehensive income, net of tax |
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4
CNB Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(All Dollar Amounts in Thousands)
(Unaudited)
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Six Months Ended |
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2004 |
2003 |
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Note: Columns may not add due to rounding.
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CNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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For the six-month period ended |
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Net
cash provided by operating |
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Net
cash provided by (used for) |
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FINANCING
ACTIVITIES |
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CNB CORPORATION AND
SUBSIDIARY (The "Corporation")
CNB CORPORATION (The "Parent")
THE CONWAY NATIONAL BANK (The "Bank")
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net income per share - Net income per share is computed on the basis of the weighted average number of common shares outstanding, 717,492 for the six-month period ended June 30, 2004 and 718,002 for the six-month period ended June 30, 2003.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances either at the Bank or on deposit with the Federal Reserve Bank. The average amount of these reserve balances for the six-month period ended June 30, 2004 and for the year ended December 31, 2003 were approximately $13,496 and $10,346, respectively.
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NOTE 3 - INVESTMENT SECURITIES
Investment securities with a par value of approximately $94,595 at June 30, 2004 and $85,195 at December 31, 2003 were pledged to secure public deposits and for other purposes required by law.
The following summaries reflect the book value, unrealized gains and losses, approximate market value, and tax-equivalent yields of investment securities at June 30, 2004 and at December 31, 2003.
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June 30, 2004 |
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(1) Tax equivalent adjustment based on a 34% tax rate.
As of the quarter ended June 30, 2004, the Bank did not hold any securities of an issuer that exceeded 10% of stockholders' equity. The net unrealized holding gains/(losses) on available-for-sale securities component of capital is $(133) as of June 30, 2004.
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NOTE 3 - INVESTMENT SECURITIES (Continued)
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December
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State,
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(1) Tax equivalent adjustment based on a 34% tax rate
As of the quarter ended December 31, 2003, the Bank did not hold any securities of an issuer that exceeded 10% of stockholders' equity. The net unrealized holding gains/(losses) on available-for-sale securities component of capital is $2,631 as of December 31, 2003.
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NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans at June 30, 2004 and December 31, 2003 by major classification:
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Changes in the allowance for loan losses for the quarter ended and six-month period ended June 30, 2004 and 2003 and the year ended December 31, 2003 are summarized as follows:
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Quarter Ended Six
Months Ended December |
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The entire balance is available to absorb future loan losses.
At June 30, 2004 and December 31, 2003 loans on which no interest was being accrued totalled approximately $235 and $351, respectively and foreclosed real estate totalled $80 and $0, respectively; and loans 90 days past due and still accruing totalled $5 and $130, respectively.
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NOTE 5 - PREMISES AND EQUIPMENT
Property at June 30, 2004 and December 31, 2003 is summarized as follows:
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December 31, |
Depreciation and amortization of bank premises and equipment charged to operating expense was $209 and $422 for the quarter ended and the six-month period ended June 30, 2004, respectively and $739 for the year ended December 31, 2003.
At June 30, 2004 and December 31, 2003, certificates of deposit of $100,000 or more included in time deposits totaled approximately $107,804 and $86,975 respectively. Interest expense on these deposits was approximately $482 and $938 for the quarter ended and the six-month period ended June 30, 2004, respectively, and $1,929 for the year ended December 31, 2003.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At June 30, 2004 and December 31, 2003, securities sold under repurchase agreements totaled $29,087 and $24,760. Securities with a book value of $34,770 ($35,386 market value) and $34,100 ($35,341 market value), respectively, are used as collateral for the agreements. The weighted-average interest rate of these agreements was 1.15 percent and .96 percent at June 30, 2004 and December 31, 2003.
NOTE 8 - LINES OF CREDIT
At June 30, 2004, the Bank had unused short-term lines of credit to purchase Federal Funds from unrelated banks totaling $27,000. These lines of credit are available on a one to seven day basis for general corporate purposes of the Bank. All of the lenders have reserved the right to withdraw these lines at their option.
The Bank has a demand note through the U.S. Treasury, Tax and Loan system with the Federal Reserve Bank of Richmond. The Bank may borrow up to $7,000 under the arrangement at a variable interest rate. The note is secured by U.S. Treasury and Agency Notes with a market value of $5,942 at June 30, 2004. The amount outstanding under the note totaled $1,652 and $970 at June 30, 2004 and December 31, 2003, respectively.
The Bank also has a line of credit from the Federal Home Loan Bank of Atlanta for $99,874 secured by a lien on the Bank's 1-4 family mortgages. Allowable terms range from overnight to twenty years at varying rates set daily by the FHLB. The amount outstanding under the agreement totalled $0 and $0 at June 30, 2004 and December 31, 2003, respectively.
NOTE 9 - INCOME TAXES
Income tax expense for the quarter ended June 30, 2004 and June 30, 2003 on pretax income of $3,173 and $2,912 totalled $1,140 and $914 respectively. Income tax expense for the six-month period ended June 30, 2004 and June 30, 2003 on pretax income of $6,114 and $5,674 totalled $2,072 and $1,768 respectively. The provision for federal income taxes is calculated by applying the 34% statutory federal income tax rate and increasing or reducing this amount due to any tax-exempt interest, state bank tax (net of federal benefit), business credits, surtax exemption, tax preferences, alternative minimum tax calculations, or other factor. A summary of income tax components and a reconciliation of income taxes to the federal statutory rate are included in fiscal year-end reports.
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
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NOTE 10 - OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENT LIABILITIES
From time to time the bank subsidiary is a party to various litigation, both as plaintiff and as defendant, arising from its normal operations. No material losses are anticipated in connection with any of these matters at June 30, 2004.
In the normal course of business, the bank subsidiary is party to financial instruments with off-balance-sheet risk including commitments to extend credit and standby letters of credit. Such instruments have elements of credit risk in excess of the amount recognized in the balance sheet. The exposure to credit loss in the event of nonperformance by the other parties to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Generally, the same credit policies used for on-balance-sheet instruments, such as loans, are used in extending loan commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose contract amounts represent credit risk:
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June 30, 2004 |
Loan commitments involve agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and some involve payment of a fee. Many of the commitments are expected to expire without being fully drawn. Therefore, the total amount of loan commitments does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may include commercial and residential real properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is the same as that involved in making loan commitments to customers. Many letters of credit will expire without being drawn upon and do not necessarily represent future cash requirements.
Management believes that its various sources of liquidity provide the resources necessary for the bank subsidiary to fund the loan commitments and to perform under standby letters of credit, if the need arises. Neither the Company nor the Bank are involved in other off-balance sheet contractual relationships or transactions that could result in liquidity needs or other commitments or significantly impact earnings.
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Bank has a defined contribution pension plan covering all employees who have attained age twenty-one and have a minimum of one year of service. Upon ongoing approval of the Board of Directors, the Bank matches one hundred percent of employee contributions up to three percent of employee salary deferred and fifty percent of employee contributions in excess of three percent and up to five percent of salary deferred. The Board of Directors may also make discretionary contributions to the Plan. For the three-month and six-month periods ended June 30, 2004 and year ended December 31, 2003, $145, $292, and $558, respectively, was charged to operations under the plan.
NOTE 12 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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NOTE 12 - REGULATORY MATTERS (continued)
Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Tier I capital to adjusted total assets (Leverage Capital ratio) and minimum ratios of Tier I and total capital to risk-weighted assets. To be considered adequately capitalized under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier I leverage, Tier I risk-based and total risked-based ratios as set forth in the table. The Bank's actual capital ratios are presented in the table below as of June 30, 2004:
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To be |
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$66,687 |
16.13% |
$33,074 |
8.0% |
$41,343 |
10.0% |
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NOTE 13 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of CNB Corporation (parent company only):
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CONDENSED BALANCED SHEET |
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CONDENSED STATEMENT OF INCOME |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts in thousands, except per share data.)
Management's Discussion and Analysis is provided to afford a clearer understanding of the major elements of the corporation's results of operations, financial condition, liquidity, and capital resources. The following discussion should be read in conjunction with the corporation's financial statements and notes thereto and other detailed information appearing elsewhere in this report. In addition, the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. The accompanying consolidated financial statements include all accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements at June 30, 2004 and for the three-month and six-month periods ending June 30, 2004 and 2003 have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q for the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
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DISTRIBUTION OF ASSETS AND LIABILITIES
The Company maintains a conservative approach in determining the distribution of assets and liabilities. Loans have increased 11.3% from $350,691 at June 30, 2003 to $390,303 at June 30, 2004 and have increased as a percentage of total assets from 57.7% to 58.8% over the same period as loan demand has strengthened in our market. Securities and federal funds sold have decreased as a percentage of total assets from 34.6% at June 30, 2003 to 33.9% at June 30, 2004 as lending has improved. This level of investments and federal funds sold provides for a more than adequate supply of secondary liquidity. Management has sought to build the deposit base with stable, relatively non-interest-sensitive deposits by offering the small to medium deposit account holders a wide array of deposit instruments at competitive rates. Non-interest-bearing demand deposits increased as a percentage of total assets from 18.2% at June 30, 2003 to 18.6% at June 30, 2004. As more customers, both business and personal, are attracted to interest-bearing deposit accounts, we expect the percentage of demand deposits to decline over the long-term. Interest-bearing deposits have increased slightly from 64.8% of total assets at June 30, 2003 to 66.4% at June 30, 2004 while securities sold under agreement to repurchase have decreased from 4.7% to 4.4% over the same period.
The following table sets forth the percentage relationship to total assets of significant components of the corporation's balance sheet as of June 30, 2004 and 2003:
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RESULTS OF OPERATION
CNB Corporation experienced earnings for the three-month period ended June 30, 2004 and 2003 of $2,033 and $1,998, respectively, resulting in a return on average assets of 1.25% and 1.38% and a return on average stockholders' equity of 12.18% and 12.46%.
CNB Corporation experienced earnings for the six-month period ended June 30, 2004 and 2003 of $4,042 and $3,906, respectively, resulting in a return on average assets of 1.27% and 1.37% and a return on average stockholders' equity of 12.17% and 12.35%.
The earnings were primarily attributable to net interest margins in each period (see Net Income-Net Interest Income). Other factors include management's ongoing effort to maintain other income at adequate levels (see Net Income - Other Income) and to control other expenses (see Net Income - Other Expenses). This level of earnings, coupled with a conservative dividend policy, have supplied the necessary capital funds to support the growth in total assets. Total assets have increased $56,429 or 9.3% from $607,742 at June 30, 2003 to $664,171 at June 30, 2004. The following table sets forth the financial highlights for the three-month and six-month periods ending June 30, 2004 and June 30, 2003:
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CNB Corporation |
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(1) For the three-month period ended June 30, 2004 and June 30, 2003, average total assets amounted to $652,757 and $579,362 with average stockholders' equity totaling $66,779 and $64,137, respectively. For the six-month period ended June 30, 2004 and June 30, 2003, average total assets amounted to $638,536 and $572,202 with average stockholders' equity totaling $66,420 and $63,249 respectively.
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NET INCOME
Net Interest Income - Earnings are dependent to a large degree on net interest income, defined as the difference between gross interest and fees earned on earning assets, primarily loans and securities, and interest paid on deposits and borrowed funds. Net interest income is effected by the interest rates earned or paid and by volume changes in loans, securities, deposits, and borrowed funds.
Interest rates paid on deposits and borrowed funds and earned on loans and investments have generally followed the fluctuations in market interest rates in 2004 and 2003. However, fluctuations in market interest rates do not necessarily have a significant impact on net interest income, depending on the bank's rate sensitivity position. A rate sensitive asset (RSA) is any loan or investment that can be repriced either up or down in interest rate within a certain time interval. A rate sensitive liability (RSL) is an interest paying deposit or other liability that can be repriced either up or down in interest rate within a certain time interval. When a proper balance between RSA and RSL exists, market interest rate fluctuations should not have a significant impact on earnings. The larger the imbalance, the greater the interest rate risk assumed by the bank and the greater the positive or negative impact of interest rate fluctuations on earnings. The bank seeks to manage its assets and liabilities in a manner that will limit interest rate risk and thus stabilize long-run earning power. Management believes that a rise or fall in interest rates will not materially effect earnings.
The Bank maintained net interest margins for the three-month and six-month periods ended June 30, 2004, of 4.18% and 4.21%, respectively, and 4.40% and 4.38%, respectively, for the same periods in 2003 as compared to management's long-term target of 4.50%. Net interest margins have been compressed at the bank and industry-wide, as we are experiencing almost fifty year lows in market interest rates. We anticipate interest rates to increase in 2004 and during 2005 which should enhance our earnings potential through a wider net interest margin.
Fully-tax-equivalent net interest income showed a 6.4% increase from $5,937 for the three-month period ended June 30, 2003 to $6,317 for the three-month period ended June 30, 2004. During the same period, total fully-tax-equivalent interest income increased by 2.1% from $7,805 to $7,967 and total interest expense decreased by 11.7% from $1,868 to $1,650. Fully-tax-equivalent net interest income as a percentage of total earning assets has shown a decrease of ..22% from 4.40% for the three-month period ended June 30, 2003 to 4.18% for the three-month period ended June 30, 2004.
Fully-tax-equivalent net interest income showed a 6.6% increase from $11,694 for the six-month period ended June 30, 2003 to $12,460 for the six-month period ended June 30, 2004. During the same period, total fully-tax-equivalent interest income increased by 1.3% from $15,531 to $15,729 and total interest expense decreased by 14.8% from $3,837 to $3,269. Fully-tax-equivalent net interest income as a percentage of total earning assets has shown a decrease of ..17% from 4.38% for the six-month period ended June 30, 2003 to 4.21% for the six-month period ended June 30, 2004.
The tables on the following four pages present average balance sheets, average yield and interest earned on earning assets, and average rate and interest expense on interest bearing liabilities for the three-month and six-month periods ended June 30, 2004 and 2003, and a summary of changes in net interest income resulting from changes in volume and changes in rate between the three-month and six-month periods ended June 30, 2004 and 2003.
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Three Months Ended 6/30/04 Three
Months Ended 6/30/03 |
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CNB Corporation and Subsidiary |
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Six Months Ended
6/30/04 Six Months Ended 6/30/03 |
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