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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1999.
REGISTRATION NO. 333-68797
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT 1
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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CNBC BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
OHIO 6021 31-1478140
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(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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100 EAST WILSON BRIDGE ROAD
SUITE 100
WORTHINGTON, OHIO 43085
(614) 848-8700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
JOHN ROMELFANGER
VICE PRESIDENT, TREASURER
AND SECRETARY
CNBC BANCORP
100 EAST WILSON BRIDGE ROAD
SUITE 100
WORTHINGTON, OHIO 43085
(614) 848-8700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
M. PATRICIA OLIVER, ESQ.
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower, 127 Public Square
Cleveland, Ohio 44114-1304
(216) 479-8500
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Approximate date of proposed sale to public:
As soon as practicable after the effective date of this Registration Statement.
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING
TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1)
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<S> <C> <C> <C>
Common Shares (without par
value).......... 125,000 $30.00 $3,750,000
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<CAPTION>
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TITLE OF EACH CLASS OF SECURITIES AMOUNT OF
TO BE REGISTERED REGISTRATION FEE
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<S> <C>
Common Shares (without par
value).......... $1,042.50
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(a) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CNBC LOGO
CNBC BANCORP
125,000 SHARES OF COMMON STOCK
$30.00 PER SHARE
We are offering for sale 125,000 shares of common stock with this
prospectus at $30 per share. This offering is not contingent on CNBC Bancorp
("CNBC") selling any minimum number of shares. CNBC's shares are currently
listed on the NASDAQ electronic bulletin board under the symbol "CNBD." This is
our initial public offering, and no active public market currently exists for
our shares. The market price of the shares after the offering may be higher or
lower than the public offering price. The minimum purchase required is 100
shares which totals $3,000 at the purchase price of $30.00 per share. For
information on how to subscribe, please see page 7 of this prospectus.
CNBC is a one bank holding company which owns all of the stock of Commerce
National Bank ("Commerce National"). Commerce National offers traditional
commercial banking products to its customers, including checking and savings
accounts, certificates of deposit, NOW accounts and money market accounts. In
addition, Commerce National offers business lines of credit and term loans,
primarily on a secured basis, and real estate loans.
TERMS OF THE OFFERING
<TABLE>
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PER SHARE TOTAL
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<S> <C> <C>
Public Price.......................... $30.00 $3,750,000
Estimated Offering Expenses........... .35 44,000
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Proceeds to CNBC...................... 29.65 $3,706,000
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</TABLE>
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 2.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
This prospectus is dated February , 1999.
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TABLE OF CONTENTS
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PAGE
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Questions and Answers about the Offering.................... 1
Risk Factors................................................ 2
If an active market does not develope, you may not be able
to sell your shares.................................... 2
Changes in our key personnel may have an adverse effect on
our success............................................ 2
Sales of large blocks of previously issued shares may
depress the value of your shares....................... 2
Our wholesale deposits may have a higher liquidity risk
and higher interest than other types of deposits....... 2
The offering price may not indicate the market price of
our shares............................................. 2
CNBC's allowance for loan losses may not be adequate to
absorb future loan losses.............................. 3
The exercise of CNBC stock options and warrants may dilute
you interest........................................... 3
Potential year 2000 computer malfunctions may adversely
affect our operations.................................. 3
Potentially adverse effect of government regulation....... 3
Our Articles and Regulations contain provisions that could
deter takeover attempts, even at a price attractive to
shareholders........................................... 3
Forward-looking statements................................ 4
Use of Proceeds............................................. 4
Determination of Offering Price............................. 4
Dilution.................................................... 5
Plan of Distribution........................................ 6
General................................................... 6
Subscribing for Common Shares............................. 7
Dividend Policy............................................. 9
Capitalization.............................................. 10
Selected Financial Data..................................... 11
Management's Discussion and Analysis........................ 12
Comparison of Financial Condition at December 31, 1998 and
December 31, 1997...................................... 12
Comparison of Financial Condition at December 31, 1997 and
December 31, 1996...................................... 12
Results of Operations for the Year Ended December 31, 1998
Compared to Year Ended December 31, 1997............... 13
Results of Operations for the Year Ended December 31, 1997
Compared to Year Ended December 31, 1996............... 14
Liquidity................................................. 14
Capital Resources......................................... 15
Year 2000 Issues.......................................... 16
Distribution of Balance Sheet Items; Interest Rates and
Interest Differential.................................. 18
Rate/Volume Analysis...................................... 19
Management of Interest Rate Risk.......................... 20
Description of Business..................................... 21
History................................................... 21
Market Area............................................... 22
Competition............................................... 22
Current Services.......................................... 23
Lending................................................... 24
Nonperforming Assets...................................... 27
Securities Portfolio...................................... 28
Deposits.................................................. 28
</TABLE>
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<TABLE>
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PAGE
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Personnel................................................. 29
Available Information..................................... 30
Description of Property..................................... 30
Market for Common Equity and Related Stockholder Matters.... 30
Supervision and Regulation.................................. 31
Directors, Executive Officers, Promoters and Control
Persons................................................... 34
Directors................................................. 34
Officers and Significant Employees........................ 36
Executive Compensation...................................... 36
Annual Compensation....................................... 36
Employment Agreement...................................... 37
Employee Stock Option Plans............................... 37
Option Grants in Last Fiscal Year......................... 38
Commerce National Bank Deferred Compensation Plans........ 38
401(k) Plan............................................... 38
Committees of the Board of Directors...................... 38
Certain Relationships and Related Transactions.............. 39
Security Ownership of Certain Beneficial Owners and
Management................................................ 40
Description of Securities................................... 41
General................................................... 41
Voting Rights............................................. 41
Dividends................................................. 41
Common Shares Fully Paid and Nonassessable................ 41
Preemptive Rights/Repurchase and Redemption............... 41
Special Vote for Control Share Acquisitions............... 41
Transfer Agent and Registrar.............................. 42
Certain Provisions of CNBC'S Articles of Incorporation and
Code of Regulations.................................... 42
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................ 44
Shares Eligible for Future Sale............................. 44
Legal Proceedings........................................... 44
Experts..................................................... 45
Financial Statements........................................ F1
APPENDIX A
APPENDIX B
Form W-9
</TABLE>
Until June , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions
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QUESTIONS AND ANSWERS ABOUT THE OFFERING
Q: Why is CNBC offering these securities and why has it chosen this time for the
offering?
A: CNBC and Commerce National must comply with certain regulations regarding the
amount of capital maintained in both organizations. It is management's desire
to maintain its current capital classifications. As a result of rapid asset
growth over the past two years, CNBC desires to raise new capital so that it
may continue to grow and serve new customers.
Q: Once I have read the information contained in this prospectus and determined
I would like to buy some stock, how do I subscribe?
A: You must complete and return both the subscription application and
subscription agreement and enclose a check or money order payable to "CNBC
Bancorp" for your entire subscription. The application and agreement are
enclosed as Exhibits A and B.
Q: When will the offering close and how soon should I send in my subscription?
A: Send in your subscription as soon as possible. Management anticipates closing
the offering as soon as possible, but no later than 90 days from the date of
this prospectus (subject, however, to up to a 30 day extension in
management's discretion). Management reserves the right to close the offering
at an amount which is less than 125,000 shares.
Q: How much stock may I purchase?
A: The minimum purchase is 100 shares. Management has not established a maximum
amount; however, management has the right to return part or all of your
subscription, with interest.
Q: Who can I call if I have further questions?
A: Call John Romelfanger or Tom McAuliffe at (614) 848-8700.
Q: Can I purchase shares through an IRA or other qualified retirement plan?
A: Yes. The administrator or trustee would still need to fill out all
appropriate forms and return them on a timely basis.
Q: Is this offering valid in all 50 states?
A: No. At this time we have only filed to register in the State of Ohio. If you
are not a resident of Ohio, please call John Romelfanger or Tom McAuliffe
before subscribing for shares.
Q: Why is the offering only registered in Ohio?
A: Each state charges fees to register the offering, which can be as much as
$1,000 plus attorney fees. We currently do not feel the expense of
registering in other states is cost effective.
Q: If my subscription is accepted, when will I receive my shares?
A: We will mail stock certificates to subscribers 15 days after we close the
offering.
Q: Can I change my mind after I have mailed my subscription?
A: No. Once we have received and processed your subscription and payment, you
cannot ask for a refund.
Q: What happens if you do not receive subscriptions for all 125,000 shares by
the expiration date of the offering?
A: Management has the option to extend the expiration date of the offering by 30
days, which it may do depending on the actual number of shares subscribed
for. Management will accept subscriptions received, even if all 125,000
shares are not subscribed for.
Q: What happens if we receive subscriptions for more than 125,000 shares?
A: Management has sole discretion regarding which subscriptions it will accept
and which ones it will return. We will consider several factors in making
this decision, including whether the subscriber is a current or prospective
customer or vendor, a current shareholder or is located in our current
geographic service area. If your subscription is returned, we will pay you
interest from the time we receive your subscription until the date we return
it.
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RISK FACTORS
Before you invest in our common shares, you should be aware that there are
risks, including those described below. You should consider these risk factors
together with all of the other information included in this prospectus before
you decide to purchase our common shares.
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP, YOU MAY NOT BE ABLE TO SELL YOUR
SHARES.
Prior to the offering, there has not been an active public market for
CNBC's common shares. Due to the small size of this offering, it is highly
unlikely that an active trading market will develop and be maintained. If an
active market does not develop, you may not be able to sell your common shares
as quickly as you desire, or perhaps at all, or sell your common shares at a
price equal to or above the price you paid for them. See "Market for Common
Equity and Related Stockholder Matters."
CHANGES IN OUR KEY PERSONNEL MAY HAVE AN ADVERSE EFFECT ON OUR SUCCESS.
Our future success depends heavily on the continued involvement of Messrs.
Thomas D. McAuliffe and John A. Romelfanger. Should either of them leave the
employ of CNBC or Commerce National, our profitability, service quality and
growth may be adversely affected. Mr. McAuliffe continues to be significantly
involved in business development and client service in addition to his
administrative duties as Chairman of the Board, President and Chief Executive
Officer of both CNBC and Commerce National. Mr. Romelfanger is responsible for
many of the administrative, financial and operational aspects of both CNBC and
Commerce National and serves as Vice President, Secretary and Treasurer of CNBC
and Chief Operating Officer and Chief Financial Officer of Commerce National.
We have entered into an employment contract with Mr. McAuliffe, but cannot
be assured of the continued service of either Mr. McAuliffe or Mr. Romelfanger.
We carry key person life insurance on both Mr. McAuliffe and Mr. Romelfanger, as
well as certain other senior officers. See "Executive Compensation -- Employment
Agreement."
SALES OF LARGE BLOCKS OF PREVIOUSLY ISSUED SHARES MAY DEPRESS THE VALUE OF YOUR
SHARES.
There are currently 1,116,972 outstanding shares of CNBC common stock.
These shares were purchased at an estimated average price of $6.75. Current
shareholders may try to lock in potentially sizeable capital gains by selling
their shares after the offering. If a large number of these sales occur, or the
market perceives that such sales could occur, the value of your shares may
decline. Additionally, CNBC has 16 shareholders who own more than 10,000 shares.
If one or more of these shareholders decides to sell substantially all of their
shares, it may adversely affect the market price of the shares. See "Security
Ownership of Certain Beneficial Owners and Management" and "Shares Eligible For
Future Sale."
OUR WHOLESALE DEPOSITS MAY HAVE A HIGHER LIQUIDITY RISK AND HIGHER INTEREST COST
THAN OTHER TYPES OF DEPOSITS.
We have a higher percentage of deposits from wholesale sources than
similarly sized banks. A wholesale deposit is typically defined as a certificate
of deposit over $100,000 and brokered deposits, which are usually issued in
increments of $99,000. While these deposits help to control operating costs by
maintaining a smaller number of accounts, obtaining these deposits is typically
a function of whether an attractive interest rate is paid which affects the
overall interest cost of deposits. If Commerce National does not pay an
attractive rate of interest, it may not be able to renew these deposits
resulting in outflows of funds. See "Management's Discussion and Analysis" and
"Supervision and Regulation."
THE OFFERING PRICE MAY NOT INDICATE THE MARKET PRICE OF OUR SHARES.
The $30 per share offering price was determined by the CNBC Board of
Directors and is substantially higher than the current book value of the shares.
The market price of the shares after this offering could be lower than the
offering price. See "Dilution," "Market for Common Equity and Related
Stockholder Matters" and "Determination of Offering Price."
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<PAGE> 7
CNBC'S ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO ABSORB FUTURE LOAN
LOSSES.
Using both objective and subjective factors, CNBC has established an
allowance for loan losses on its balance sheet that management believes is
adequate to absorb probable loan losses in its portfolio. However, the following
factors make CNBC's evaluation of its allowance more subjective than other
banks' with an established history:
- Commerce National is only 7 years old, during which time the local
economy has not experienced any significant recessionary periods.
- Because of the small business focus, CNBC's average loan size is much
larger than average loan size of many comparable banks.
- Since its inception, Commerce National has grown substantially,
especially over the last 2 years, and loan quality problems often take
several years to materialize.
- Commerce National's short history may not allow management to accurately
predict loan losses based on historical experience.
Because of these factors, CNBC may have a higher risk that its allowance
for loan losses may not be adequate to absorb future loan losses.
See "Description of Business-Lending."
THE EXERCISE OF CNBC STOCK OPTIONS AND WARRANTS MAY DILUTE YOUR INTEREST.
CNBC has 235,610 shares reserved for issuance in the event of the exercise
of existing stock options and warrants by their respective holders. These
options and warrants allow their holders to purchase specified amounts of stock
for a period of time at a fixed price. The exercise of these options and
warrants could have a dilutive effect on the earnings per share and book value
of CNBC common stock to existing shareholders. See "Dilution" and Notes 10 and
11 to the Consolidated Financial Statements.
POTENTIAL YEAR 2000 COMPUTER MALFUNCTIONS MAY ADVERSELY AFFECT OUR OPERATIONS.
Commerce National's ability to process and record virtually all customer
transactions depends on the utilization of several different computer programs.
In addition, the business of many of Commerce National's customers is highly
dependent on computer programs. The year 2000 problem common to most
organizations involves the inability of their software and databases to
recognize year 2000-related dates. If not corrected, this problem could result
in disruptions which could prevent the borrowers from repaying their loans to
Commerce National. Moreover, the fear of such program failure may result in
unexpected withdrawals from Commerce National deposit accounts. Management has
developed and is in the process of implementing formal plans to evaluate and
minimize the risks created by these issues. Contingency plans have also been
developed to provide alternate solutions should systems used internally by
Commerce National fail to process data consistently before and after the century
date change. See "Management's Discussion and Analysis - Year 2000."
POTENTIALLY ADVERSE EFFECT OF GOVERNMENT REGULATION.
We are subject to extensive supervision and regulation by the Federal
Reserve Board, the Federal Deposit Insurance Corporation and the Office of the
Comptroller of the Currency. Many of these laws and regulations are intended to
protect depositors, loan customers, the public and the FDIC, not the
shareholders' interests. The regulatory requirements imposed upon us may change
rapidly and unpredictably, and could adversely affect the banking industry in
general or our operations in particular. See "Supervision and Regulation." Our
Articles and Regulations contain provisions that could deter takeover attempts,
even at a price attractive for shareholders.
OUR ARTICLES AND REGULATIONS CONTAIN PROVISIONS THAT COULD DETER TAKEOVER
ATTEMPTS, EVEN AT A PRICE ATTRACTIVE TO SHAREHOLDERS.
CNBC's Articles of Incorporation and Regulations, along with Ohio and
federal law may make it difficult to change or gain control of CNBC, even at an
attractive price to shareholders. As a result, shareholders who might
3
<PAGE> 8
desire to participate in such a transaction may not have an opportunity to do
so. These provisions may reduce the market price of CNBC shares. Some of these
provisions may also make the removal of the current Board of Directors or
management more difficult. These provisions include:
- restrictions on the acquisition of CNBC's equity securities;
- the classification of the terms of the members of the Board of Directors;
- shareholders meeting restrictions;
- the issuance of serial preferred stock and additional shares of
common stock without shareholder approval; and
- supermajority provisions for the approval of certain business
combinations.
See "Description of Securities."
FORWARD -- LOOKING STATEMENTS.
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
USE OF PROCEEDS
The net proceeds to CNBC from the sale of the 125,000 common shares offered
hereby, assuming a public offering price of $30.00 per share, and after
deducting sales commissions and the estimated offering expenses, are estimated
to be approximately $3.71 million. CNBC currently intends to utilize all of the
net proceeds it receives to purchase subordinated debentures and common stock of
Commerce National to increase Commerce National's capital ratios.
CNBC currently anticipates investing 50% of the proceeds in Commerce
National common stock and 50% in subordinated debentures issued by Commerce
National. The final determination on the use of proceeds will be based on the
impact of each on the regulatory capital ratios required to be maintained by
Commerce National and the impact of state franchise taxes on each.
The allocation of the use of net proceeds represents management's estimates
based upon current business and economic conditions. Although CNBC does not
contemplate material changes in the proposed allocation of the use of proceeds,
to the extent CNBC finds that adjustment is required by reason of existing
business conditions the amounts shown may be reallocated or put to different
uses.
DETERMINATION OF OFFERING PRICE
The offering price of the shares was set by the Board of Directors of CNBC
based on several factors. The factors given the most weight by the Board were
price to earnings ratios ("PE ratio") and book value to market value multiples
("BV multiple") of other publicly traded bank holding company stocks. The main
group utilized
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for comparison was comprised of 10 bank holding companies located in Ohio.
Listed below are price indicators and performance measures for the group
compared to CNBC:
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AVERAGE OF RANGE OF
PRICE INDICATORS CNBC(1) PEER GROUP PEER GROUP
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PE Ratio(2)............................................. 20.3x 19.5x 13.9x-28.6x
BV Multiple............................................. 280% 225% 101%-306%
PERFORMANCE MEASURES
Asset Size (millions)................................... $ 175 $ 587 $92-$1,181
Return on Equity........................................ 16.12% 12.83% 3.60%-18.72%
Operating Efficiency.................................... 52% 55% 47%-63%
</TABLE>
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(1) Price indicators for CNBC at the offering price of $30 per share.
(2) PE ratio is calculated using most recent 12 month diluted earnings per
share.
The Board also reviewed price indicators for bank holding companies of
similar size located in other midwestern states and much larger, publicly traded
Ohio bank holding companies. Other factors considered in the determination of
the offering price included recent trades of CNBC's stock, which are limited,
CNBC's geographic location and the stability of its management. Based on this
information, the Board established what it felt was a fair PE ratio and BV
multiple for CNBC's common shares to be sold in this offering.
DILUTION
At December 31, 1998, the book value of CNBC was $12.0 million, or $10.72
per share. After taking into consideration the changes in book value resulting
from the sale by CNBC of the common shares offered hereby at an assumed public
offering price of $30.00 per share, and after taking into consideration
application of the net proceeds from this offering as well, the pro forma book
value of CNBC at December 31, 1998 would have been $15.7 million, or $12.62 per
share. This represents an immediate increase in net book value of $1.90 per
share to existing shareholders and dilution in net book value of $17.38 per
share to purchasers of common shares in this offering. Book value is determined
by dividing shareholders' equity by the number of shares outstanding. Book value
is not necessarily indicative of the fair market value of shares outstanding.
The following table illustrates the book value dilution to purchasers of common
shares in this offering:
<TABLE>
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Public offering price per share............................. $30.00
Book value per share at December 31, 1998................... $10.72
Increase per share attributable to existing shareholders.... $ 1.90
Pro forma book value per share after the offering(1)........ $12.62
Dilution of book value to investors(2)...................... $17.38
Average price paid by existing shareholders................. $ 6.75
</TABLE>
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(1) Pro forma book value equals the $12.0 million of adjusted shareholders'
equity, plus net proceeds of $3.71 million from this offering, divided by
1,241,972 pro forma shares outstanding.
(2) Dilution is determined by subtracting the pro forma book value after this
offering from the public offering price paid by investors in this offering.
The pro forma book value per share would be $12.62 and the dilution to
investors would be $17.38.
The directors and executive officers have purchased their shares at various
times throughout Commerce National's history and at prices significantly lower
that the current offering price. Of the total shares currently owned by
directors and executive officers, which are detailed under "Security Ownership
of Certain Beneficial Owners and Management", approximately 73% were purchased
in Commerce National's initial offering in 1991 at an adjusted price of $5.68.
In the next two offerings, closed in 1992 and 1994, directors' purchases of
common
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stock comprised 8% and 6% of shares currently held at prices equal to $6.82 and
$8.18, respectively. Directors and officers have acquired additional shares
through the exercise of warrants and stock options, purchases of common stock in
the secondary market and in CNBC's privately placed stock offering closed in
1997. Additionally, directors and officers currently own approximately 70% of
CNBC's outstanding warrants, which entitle the holder to purchase a share of
common stock for $5.68 per share and expire on October 11, 2000.
The following table sets forth, as of December 31, 1998, the number of
common shares purchased from CNBC and the total consideration paid to CNBC by
existing shareholders and the new investors purchasing common shares in the
offering at the public offering price of $30.00 per share (before deducting
estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
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NUMBER PERCENT AMOUNT PERCENT
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Existing shareholders............... 1,116,972 90% $7,531,249 67%
New investors....................... 125,000 10% $3,750,000 33%
</TABLE>
As part of its initial stock offering in 1991, Commerce National issued
warrants to all purchasers of common stock. A warrant is a freely transferable
certificate which entitles the holder to purchase a share of common stock at the
initial stock offering price of $5.68. These warrants expire on October 11,
2000. As consideration for funding the initial start-up costs for Commerce
National, the founding organizers received one warrant for every five shares of
common stock which they purchased. All other initial shareholders received one
warrant for every twenty shares purchased in the offering.
If all existing warrants were exercised, CNBC would receive $338,000 in new
capital and would issue 59,520 shares. This would reduce the pro forma book
value after this offering from $12.62 per share to $12.31 per share.
Additionally, diluted earnings per share, on a pro forma basis, would be reduced
by approximately $.01 per share.
Stock options differ from warrants in several ways, which we have listed
below.
- Options are not transferable, they are exercisable only by the employee
or director originally granted the option.
- A gain is measured on the exercise date between the market value and
exercise price of the stock which is recognized by the individual as
compensation. Additionally, CNBC receives a tax deduction for the amount
of gain recognized by the individual. This tax savings is treated as
additional payment for the stock and is directly credited to the capital
accounts of CNBC.
- Currently, options granted have a three or five year vesting schedule
until they can be exercised.
See Note 11 to the consolidated financial statements for additional
disclosures regarding stock options.
If all existing dilutive options were exercised, CNBC would receive a total
of approximately $2,668,000 in new capital and would issue 162,830 shares.
Because the average price per share is $16.39, CNBC's pro forma book value would
actually increase. The maximum amount diluted earnings per share would be
reduced if all options were immediately exercised would be $.10 per share,
assuming CNBC did not repurchase any of these shares and hold them as treasury
stock.
PLAN OF DISTRIBUTION
GENERAL
The prospectus is dated February , 1999. The offering commences this date
and shall remain open for up to 90 days thereafter, except as follows: this
offering may be terminated early or may be extended by up to 30 days. Any
extension and early termination of this offering is at the discretion of CNBC.
CNBC is offering up to 125,000 common shares for a cash price of $30 per
share. A minimum purchase of 100 shares ($3,000) is required. CNBC reserves the
right to accept individual subscriptions for fewer than 100
6
<PAGE> 11
shares, or to reject or cancel any subscription, in whole or in part, for any
reason whatsoever. Management will consider the following factors in determining
which subscriptions it will accept and which ones it may reject:
- whether the subscriber is a current or prospective customer or vendor
- whether the subscriber is a current shareholder
- the size of the subscription
- whether the subscriber is located in Commerce National's current
geographic service area
No investor may own, directly or indirectly, an amount of shares equal to or
greater than 10% of CNBC's outstanding shares without the consent of CNBC and
the Federal Reserve Board.
This offering is not underwritten and is not conditioned on the sale of any
minimum number of shares. Only the directors and officers of CNBC and authorized
selling agents are authorized to solicit subscriptions for shares. The directors
and officers of CNBC intend to solicit by means of personal and telephone
contact with prospective subscribers, and by direct mailing of the prospectus.
Offers for shares must be preceded or accompanied by this prospectus. The
persons authorized to solicit subscriptions may be reimbursed for reasonable
expenses, if any, incurred in connection with the selling of the common shares.
The prospectus includes two appendices: Appendix A, the subscription
application and Appendix B, the subscription agreement. Executable copies of the
application, together with IRS Form W-9 accompany the prospectus. The prospectus
and subscription agreement are incorporated by reference in the application. By
signing the latter, the subscriber attests to having read the prospectus in its
entirety, including the appendices and agrees to be bound by the terms contained
in the application and the agreement. The agreement does not require separate
execution.
SUBSCRIBING FOR COMMON SHARES
You may subscribe to purchase common shares offered hereunder by executing
and delivering an application to CNBC, together with a check payable to "CNBC
Bancorp" in the amount of the purchase price and a completed IRS Form W-9
Request for Taxpayer Identification Number and Certification.
CNBC will notify you in writing as to the extent to which your offer is
accepted, not later than 15 days after the closing date of the offering. To the
extent your offer is not accepted by CNBC, and concurrently with such rejection,
Delaware County Bank and Trust Company as Escrow Agent will return your
unaccepted funds together with interest actually earned thereon.
All funds received from Subscribers for CNBC's common shares, which meet
the conditions of the application and of the agreement, will be deposited in an
interest-bearing account at Delaware County Bank and Trust Company (the "Escrow
Account"). The Escrow Account will be maintained in a Federal Investors money
market mutual fund account at Delaware County Bank and Trust Company, in the
manner provided in the agreement ("Bank as Escrow Agent"). The Escrow Account
will bear variable interest rate which should approximate 4% per annum.
On the last day of the offering, CNBC will conduct a closing at its
offices. If the offering is extended by 30 days, CNBC will provide written
notice of such extension to all investors. The last possible date on which this
offering may close is June , 1999. Upon the closing, subscription funds in the
Escrow Account relating to applications accepted by CNBC, shall be released to
CNBC in the amount corresponding to the shares purchased by investors.
Applications shall be closed at the earliest date after CNBC, in its discretion,
has determined that all of the requirements of the related application and
agreement have been met, the subscription has been accepted and the requisite
good funds deposited in the Escrow Account.
CNBC will mail to each purchaser, within 15 business days after the
applicable closing date, a stock certificate, registered in purchaser's name or
as directed by purchaser, representing the respective common shares subscribed,
against delivery of the purchase price and any interest thereon.
7
<PAGE> 12
If CNBC does not accept an application for any reason then the funds
submitted on account of the purchase price shall be returned to each Subscriber
within 15 days after the closing in the amount of his/her/its subscription, plus
any interest earned by the respective subscription amount.
If for any reason whatsoever, the offering does not close by 90 days from
the date of the offering or by 30 days thereafter, if CNBC elects to extend the
offering, CNBC will deliver written notice of such to purchaser, and will return
to purchaser the amount of his/her/its deposit, plus any interest earned
thereon.
8
<PAGE> 13
DIVIDEND POLICY
As a one bank holding company, the ability of CNBC to pay dividends to its
shareholders is primarily dependent upon the receipt of dividends and interest
payments from Commerce National. Without the approval of the Comptroller of the
Currency, Commerce National may not pay a dividend to CNBC if the total of all
dividends declared by Commerce National in any calendar year exceeds the total
of net profits for that year combined with its retained net profits for the
preceding two calendar years, less any required transfers to surplus or fund for
the retirement of any preferred stock. Commerce National's ability to pay
dividends is also dependent upon its ability to continue to meet regulatory
capital requirements. See "Supervision and Regulation" and Note 14 to the
Consolidated Financial Statements.
In December 1995, Commerce National declared its first annual cash dividend
to shareholders. CNBC's current policy is to declare dividends semi-annually in
June and December. Noted below are dividends declared for the years ended 1998
and 1997.
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED PER SHARE
------------------
<S> <C>
Year ended December 31, 1998 $.34
Year ended December 31, 1997 $.25
</TABLE>
Although CNBC intends to continue to pay cash dividends on its common
shares in the future based upon its net income and available cash flow, there
can be no assurance that CNBC will have earnings sufficient to pay a dividend on
its common shares or that, even if there are sufficient earnings, dividends will
be permitted under applicable laws or regulatory requirements. Declaration of
dividends will be considered by the Board of Directors semi-annually and will be
determined, at the discretion of the Board of Directors, in light of CNBC's
results of operation, financial condition, capital requirements, contractual
restrictions and other factors deemed relevant by the Board of Directors. The
Board of Directors will also periodically consider stock dividends as a means of
enhancing the liquidity and marketability of CNBC's stock.
9
<PAGE> 14
CAPITALIZATION
The following table presents the capitalization of CNBC at December 31,
1998 (i) on an actual basis and (ii) giving effect to the sale of 125,000 shares
of common shares offered hereby at the public offering price of $30.00 per share
and the initial application of the estimated net proceeds therefrom. The table
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis," and the Financial Statements and notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
SHAREHOLDERS' EQUITY
Common Stock: No Par Value; Authorized Shares -
2,000,000; Issued and Outstanding, 1,116,972
Actual and 1,241,972 as adjusted................. $ 8,379,375 $12,085,375
Retained Earnings.................................. 3,579,127 3,579,127
Accumulated Other Comprehensive Income............. 13,000 13,000
----------- -----------
Total Shareholders' Equity............... $11,971,502 $15,677,502
=========== ===========
</TABLE>
10
<PAGE> 15
SELECTED FINANCIAL DATA
The following table contains selected financial data derived from CNBC's
audited consolidated financial statements for the fiscal years ended December
31, 1998, 1997, 1996, 1995, and 1994. The summary below should be read in
conjunction with the financial statements of CNBC and Management's Discussion
and Analysis set forth herein. All per share data presented have been adjusted
to reflect all stock splits and stock dividends.
UNAUDITED SUMMARY FINANCIAL DATA
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........... $ 12,727 $ 9,730 $ 7,679 $ 6,439 $ 4,183
Interest expense.......... 6,221 4,624 3,704 3,113 1,595
---------- ---------- ---------- --------- ----------
Net interest income....... 6,506 5,106 3,975 3,326 2,588
Provision for loan
losses................. (480) (386) (254) (288) (252)
Other income.............. 248 189 161 113 60
Operating expenses........ (3,481) (2,769) (2,246) (1,887) (1,625)
Income tax expense........ (969) (745) (573) (440) (167)
---------- ---------- ---------- --------- ----------
Net income................ $ 1,824 $ 1,395 $ 1,063 $ 824 $ 604
========== ========== ========== ========= ==========
SELECTED PER SHARE DATA:
Basic earnings per common
share.................. $ 1.64 $ 1.31 $ 1.02 $ .79 $ .59
Diluted earnings per
common share........... $ 1.48 $ 1.21 $ .95 $ .76 $ .58
Dividends declared per
common share........... $ .34 $ .25 $ .175 $ .125 (1)
Book value per share...... $ 10.72 $ 9.43 $ 7.88 $ 7.08 $ 6.39
Shares outstanding(2)..... 1,116,972 1,111,780 1,053,654 1,046,192 1,046,140
SELECTED OPERATING RATIOS:
Return on average
assets................. 1.16% 1.20% 1.14% 1.09% 1.08%
Return on average
shareholders' equity... 16.12% 15.18% 13.38% 11.52% 9.96%
Dividend payout........... 20.79% 20.66% 18.42% 16.45% (1)
Average equity to average
assets................. 7.20% 7.83% 8.50% 9.47% 11.07%
SELECTED FINANCIAL CONDITION
DATA:
Total Assets.............. $ 175,113 $ 139,325 $ 104,207 $ 82,224 $ 67,947
Loans, net................ 148,881 117,078 85,087 67,907 54,981
Securities
available-for-sale..... 5,218 4,051 3,130 3,364 3,711
Deposits.................. 151,480 119,105 90,377 69,048 58,246
Borrowed funds............ 10,685 8,860 4,884 5,149 2,659
Shareholders' equity...... 11,972 10,482 8,297 7,404 6,681
</TABLE>
- ---------------
(1) Cash dividends were not declared prior to 1995.
(2) As adjusted for stock splits and dividends.
11
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion presents an analysis of CNBC's financial condition
and results of operations as of and for the year ended December 31, 1998
compared to December 31, 1997, and with respect to the year ended December 31,
1997 compared to the year ended December 31, 1996. This discussion is designed
to provide the reader with a more comprehensive review of the operating results
and financial position than could be obtained from reading the financial
statements alone. Forward-looking statements contained in this discussion
involve risks and uncertainties and are subject to change based on various
important factors. Actual results could differ from those expressed or implied.
This analysis should be read in conjunction with the financial statements and
related footnotes and the selected financial data included elsewhere in this
prospectus.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets increased $36 million, or 26%, to $175 million at December 31,
1998. The two largest components of this increase are an increase of $32 million
in loans outstanding and an increase in cash and cash equivalents of $2.4
million.
The increase in loans is comprised primarily of a $17 million increase in
real estate investment loans and a $12 million increase in business loans. These
increases are in line with Commerce National's budgeted growth for the year and
are comparable to the growth experienced by Commerce National during the last
several years. In 1998, the sale of a locally owned savings bank to a regional
bank holding company resulted in Commerce National receiving more opportunities
for new customers, especially those with investment real estate loans.
Over the past three years, Commerce National has experienced loan growth of
$82 million. Of this total, 53% has been in business real estate loans and 35%
in business lines of credit and term loans. Management anticipates opportunities
are good for continued growth in these lending areas due to Commerce National's
small business focus, a strong, local economy, and continuing consolidation of
its competitors.
The primary increase in liabilities was a $32 million increase in deposit
accounts. Of this increase, $5 million was in interest bearing demand accounts
and a result of increased business with title companies. Savings balances grew
$19 million and are a result of Commerce National's small business focus and
available cash management products for its customers. Certificates of deposit
grew $4 million, with $2.5 million of this growth achieved through solicitation
of deposits on the national rate-listing network to which Commerce National
subscribes.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Commerce National experienced its highest percentage growth in its history
during 1997. Total assets grew $35 million, an increase of 34% over year end
1996.
Loans increased substantially in 1997, increasing $32 million for the year.
Real estate investment loans grew $16 million and business loans grew $12
million, both reflecting the focus of Commerce National on small business and
entrepreneurs.
Premises and equipment increased $1.6 million, reflecting management's
decision to purchase its existing main office building.
The primary increase in liabilities was a $29 million increase in deposits.
Of this amount $15 million was in savings and $12 million was in certificates of
deposit. As previously stated, Commerce National's focus on small business and
innovative cash management products have resulted in increases in savings
balances of corporate customers. A total of $10 million of the $12 million
increase in certificates of deposit was due to deposits raised through the
national rate-listing network.
Additionally, borrowings increased $4 million, with $2 million of the
increase representing a long term loan payable used by CNBC to supplement the
capital of Commerce National. CNBC also issued $1 million in new common stock
pursuant to a private placement.
12
<PAGE> 17
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
Net income for the year ended December 31, 1998 was $1,824,000, a 30.8%
increase over the $1,395,000 reported for 1997. The increase in net income was
primarily driven by a $1,400,000 increase in net interest income, offset by a
$712,000 increase in operating expenses, a $94,000 increase in the provision for
loan losses and a $224,000 increase in federal income tax expense.
The 27.4% increase in net interest income was primarily the result of an
increase in average loans outstanding of 31% for 1998 compared with 1997.
Similar to 1997, loan growth was most significant in the business and real
estate investment loan categories, which reflects Commerce National's business
focus and an expanding local economy. At December 31, 1998, approximately 18% of
business real estate loans were for the purpose of financing business customers'
operating facilities. The remaining 82% of business real estate loans were for
the purpose of financing residential and commercial investment properties.
Management attributes Commerce National's loan growth to a number of factors,
including:
- Referrals from existing customers who are pleased with the service
quality they receive from Commerce National;
- Primary focus of 14 of Commerce National's 37 full-time employees on
business development and existing customer relationship satisfaction,
which helps to insure the quality and responsiveness of service Commerce
National's customers expect;
- Continued involvement of CNBC's outside directors in business development
efforts;
- A vibrant, diverse, local economy; and
- Continuing consolidation of local competitors which results in a lesser
focus on providing quality customer service by Commerce National's
competitors.
Commerce National's net interest margin declined slightly during this
period due to a slightly lower percentage of its earning assets invested in
loans and a small decrease in the average yield on interest earning assets.
Management anticipates that the local economy will continue to expand
although at a slower pace than in the last 24 months. Several large employers,
such as Wendy's International, The Limited and related companies, Nationwide
Insurance, The Ohio State University, and the State of Ohio governmental
entities, complement a large number of small and emerging businesses to create
an economy that has grown steadily and is less susceptible to significant
downtrends because of its diversity.
The increase in the provision for loan losses is due to the growth of the
overall loan portfolio.
The 25.7% increase in operating expenses is broken down as follows:
<TABLE>
<S> <C>
Salaries and Benefits....................................... $547,000
Occupancy and Equipment, net................................ (83,000)
Data Processing............................................. 32,000
Legal and Professional...................................... 21,000
Customer Courier............................................ 29,000
State Franchise Tax and Other Expenses...................... 166,000
</TABLE>
The increase in salaries and benefits is due to personnel additions to
generate and support Commerce National's growth. During 1998 and 1997, Commerce
National hired 8 and 7 full-time employees, respectively, with only one employee
termination. One of the key measures utilized by management to track personnel
efficiency is the dollar amount of revenues generated per dollar amount of
personnel expense. For the years ended December 31, 1998 and 1997, these figures
were $3.25 and $3.46, respectively. The decrease in Occupancy and Equipment
expense is due to the impact of the purchase of Commerce National's main office
in June, 1997 compared to leasing the facility. The building is fully leased
with Commerce National occupying approximately
13
<PAGE> 18
40% of the building. Rental income received is offset against the operating cost
for the office. The increase in legal and professional fees are related to loan
workout situations and other corporate matters. The remaining increases in
expenses are due to Commerce National's continued growth. The increase in
federal income tax expense is the result of CNBC's increased profitability.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
Net income for 1997 was $1,395,000, a $332,000, or 31% increase over 1996.
This increase is the result of an increase of $1,131,000 in net interest income
and $27,000 in other income offset by increases of $131,000 in the provision for
loan losses, $523,000 in operating expenses and $172,000 in federal income tax
expense.
The increase in net interest income of 28% was the result of a 30% increase
in average loans outstanding. CNBC's net interest margin increased slightly to
4.62% from 4.47% in 1996, primarily a result of a higher percentage of average
earning assets in loans. For the second year in a row, growth in the real estate
investment loan category was strong at $16.2 million for 1997. Loans to
businesses for operating purposes, equipment and other needs also increased
significantly, growing $12.6 million. The growth in these areas was the result
of a strong local economy, CNBC's small business focus and the addition of
several business development personnel during the past 18 months. Growth in
other income is primarily the result of increased service charge income on
deposit accounts. Deposits increased $28.7 million in 1997, the largest annual
increase CNBC has experienced. Of this amount, $15.4 million was in savings
deposits, which includes excess savings funds of business customers utilizing
Commerce National's automated funds management systems. Additionally,
certificate of deposit growth was primarily the result of an increase of $10.2
million in funds solicited through the national rate listing network to which
Commerce National subscribes.
The increase in the provision for loan losses of $131,000 reflects amounts
determined necessary to support the growth in the loan portfolio and partially
offset loan charge-offs experienced in 1997 of $50,000.
Changes in operating expenses are summarized as follows:
<TABLE>
<S> <C>
Salaries and benefits....................................... $324,000
Occupancy and equipment..................................... (14,000)
Data Processing............................................. 30,000
Other....................................................... 183,000
</TABLE>
Most of these changes in operating expenses were a result of Commerce
National's asset and deposit growth. The personnel efficiency ratio, defined as
total net revenues divided by salaries and benefits, increased slightly to $3.46
for 1997 compared to $3.43 for 1996. The decrease in occupancy and equipment
reflects the decision by Commerce National to purchase its main office building
on June 1, 1997. The rent income received from tenants offsets the operating
costs of the building and has resulted in a net decrease in its operating costs
compared to the rent expense paid in 1996 when Commerce National was a tenant in
the building. The largest increases in other expenses are legal fees of $54,000,
courier fees of $31,000 and check fraud losses of $35,000. The legal fees
related primarily to an increase in litigation related to certain loan
customers. The increase in courier fees represents a 27% increase over the prior
year, which is in line with Commerce National's growth. The check fraud losses
were the first ever experienced by Commerce National. Management has implemented
new procedures to attempt to minimize the future risk of these types of losses.
The increase in federal income tax expense is the result of CNBC's increased
profitability.
LIQUIDITY
CNBC's objective in managing liquidity is to maintain the ability to
continue to meet the cash flow needs of its customers, such as new loans or
deposit withdrawals, as well as its own financial commitments. The principal
sources of liquidity are new deposit accounts, loan principal payments, money
market mutual funds, securities available for sale, federal funds sold and cash
and deposits with banks. Along with its liquid assets, CNBC has additional
sources of liquidity available to ensure that adequate funds are available as
needed which include, but
14
<PAGE> 19
are not limited to, the sale of loan participations to other financial
institutions, the purchase of federal funds and borrowing from the Federal Home
Loan Bank. Management believes that it has the capital adequacy, profitability
and reputation to meet its current and foreseeable liquidity needs.
The two primary liquidity needs of Commerce National are funding loans and
net withdrawals from deposit accounts.
Net increases in loans totaled $32.3 million and $32.4 million in 1998 and
1997, respectively. These loan growth totals represent 96% and 93% of cash flows
used for investing activities. Loans are primarily funded through deposit
growth, supplemented by long-term borrowings. Commerce National's commitments,
as further detailed in Note 12 to the financial statements, are primarily
commitments to fund loans. New loan commitments have typically averaged between
$8 million and $16 million and result in approximately $4 million in new loans
booked per month. Net loans grow by a smaller amount due to loan payoffs.
Although Commerce National has a large amount of approved, unadvanced lines of
credit, this is not a significant liquidity risk. Management has tracked the
utilization percentage on its lines of credit which have ranged between 35% and
50%. At December 31, 1998, utilization was 42%.
Listed below is a summary of the primary cash flows from financing
activities which have funded loan growth. Deposits are broken down between those
generated from Commerce National's customers located in its primary market area
("Primary") and those generated through the national rate listing network
("Brokered").
<TABLE>
<S> <C> <C>
1998 1997
----------- -----------
Deposits - Primary................................. $29,926,000 $18,497,000
Deposits - Brokered................................ 2,449,000 10,232,000
Net Borrowings..................................... 1,824,000 3,976,000
Other - Net........................................ (298,000) 735,000
----------- -----------
Total Funds Provided............................... $33,901,000 $33,440,000
=========== ===========
</TABLE>
Although Commerce National has experienced net deposit growth since its
inception, deposit balances fluctuate during the month and seasonally, in the
first quarter of the year. At December 31, 1998, Commerce National had $36
million in available short-term funding sources to mitigate any risks from
changes in deposit account balances, which represents 36% of checking and
savings deposits which can be immediately withdrawn. These sources are detailed
as follows:
<TABLE>
<S> <C>
Short-term investments.................................... $13,116,000
Unused borrowing capacity with the Federal Home Loan
Bank.................................................... 15,091,000
Federal Funds lines of credit with other banks............ 6,400,000
Unpledged Investment Securities........................... 1,749,000
-----------
Total..................................................... $36,356,000
===========
</TABLE>
Additionally, Commerce National could accept approximately $21 million in
additional brokered certificates of deposit before it would reach its internally
set maximum of 30% of total deposits.
CAPITAL RESOURCES
CNBC and Commerce National are both subject to regulatory capital
requirements. These requirements measure capital levels utilizing three
different calculations. Based on these calculations, CNBC and Commerce National
are assigned to a capital category which, among other things, dictates certain
business practices of the organization, the level of Commerce National's FDIC
insurance premium and which process is followed in obtaining regulatory
approvals necessary for branch applications, mergers and similar transactions.
CNBC's capital requirements are measured on a combined basis with Commerce
National, using consolidated totals. Commerce National is measured
independently. As of December 31, 1998, CNBC was considered in the "adequately
capitalized" category and Commerce National was classified in the "well
capitalized" category. It is management's policy to manage the growth of
Commerce National and provide for the appropriate capital
15
<PAGE> 20
resources that will result in Commerce National maintaining its classification
as a "well capitalized" institution. Similarly, it is management's policy to
maintain the classification of CNBC as either "adequately capitalized" or "well
capitalized." For further information on capital requirements, see Note 14 to
the Consolidated Financial Statements.
YEAR 2000 ISSUES
Management began its commitment for evaluating the impact of Year 2000
("Y2K") issues during 1997. Management's initial procedures included a thorough
inventory of all information technology ("IT") systems and all other significant
operating systems within Commerce National. All IT systems were then assigned a
rating from 100 to 0, with 100 representing the most significant systems which
required the highest level priority for testing and evaluation and 0 the least
significant. The following were the major factors considered in assigning this
rating:
1. How critical is the system to customer service?
2. How quickly and effectively can a contingency plan be implemented if the
system fails due to Y2K issues?
3. How many transactions are processed by the system?
4. What is the potential impact to the Bank's liquidity if the system
fails?
Management identified three IT systems that it rated highly and classified these
systems as "mission critical." These systems are as follows and are more fully
described below, including our current status in testing and evaluating these
systems.
1. Kirchman Dimension 3000
2. Fedline
3. Proof and Item Capture
Kirchman Dimension 3000 ("D3000")
D3000 is the software which Commerce National utilizes for processing and
recording all customer deposit and loan transactions and accounts. D3000
prepares a daily balance sheet and income statement which are critical to the
proper operation of the Bank and serve as the base for virtually all financial
and regulatory reporting. D3000 is leased from and supported by Kirchman
Corporation and is utilized by over 500 banks across the United States ranging
in size from de novo banks to bank holding companies exceeding $15 billion in
consolidated assets. Critical to the evaluation of the software is the fact that
Kirchman Corporation does not release the source code of its computer program,
therefore all banks utilizing the software operate on the same software. No
customization or editing of the programs is permitted.
Testing of D3000 has been completed by Kirchman Corporation and by Commerce
National. Kirchman Corporation completed its testing in mid-1998 and released
the testing results, including copies of documentation supporting the test
results on CD ROM disks. After reviewing the testing results, Commerce National
organized a joint, independent testing program of the software with 33 other
banks which operate D3000 on the same hardware, an IBM AS/400. A thorough review
of D3000 was made to identify all date-related fields used. Test scripts were
then developed by members of the testing group. One of the banks permitted the
use of its database of customers to complete the testing. The testing group
rented a computer hot site for a period of four weeks to operate the system
utilizing 13 differing test dates spanning December, 1999, through January,
2002. The results of this testing and the results of Kirchman Corporation's
testing revealed no significant deficiencies in D3000's ability to properly
process and record transactions and reports beyond the year 2000. Data tapes
were saved to further test the system in the fall of 1999 to confirm that any
updates completed on D3000 remain Y2K compliant.
16
<PAGE> 21
Fedline
Fedline is the operating software utilized to process transactions and
communicate with the Federal Reserve. The most significant transactions
processed with the Federal Reserve include wire transfers, ACH and tax payments.
The Federal Reserve has developed a comprehensive testing schedule which allows
banks to operate in a "test mode" during certain times. Commerce has completed
its testing of these three areas successfully, with no significant deficiencies
noted. Other minor areas are currently in the testing stage and will be
completed by March 31, 1999.
Proof and Item Capture
Commerce National's proof and item capture system ("items system")
encompasses the equipment and software which is needed to magnetically encode
individual checks deposited by its customers so that they can be properly
processed by the Federal Reserve. Additionally, the items system processes loan
payments and other internal transactions as well as the checks which its
customers have written.
Commerce National currently pays another area financial institution to
process its checks and other transactions. This bank's items system is currently
being tested for Y2K compliance. Testing is expected to be completed by April
30, 1999. However, Commerce National is currently in the process of purchasing
the equipment and software which will enable it to process its own items. This
new system has been certified by the vendors as Y2K compliant and will be
thoroughly tested prior to implementation by Commerce National. It is
anticipated that the new system will be tested and operational by April 30,
1999. The new system is being purchased to enhance customer service and gain
certain operational efficiencies.
Other IT Systems
The following software systems were identified by management as requiring
some level of Y2K testing or verification. Management procedures included
confirmation with the vendors regarding Y2K compliance, review of vendor testing
plans, methodology and results and, in certain cases, actually operating the
software in a Year 2000 test mode. Results of these procedures were positive,
with no significant Y2K failures noted.
1. Magicwriter ACH - Utilized by customers to initiate electronic tax
payments, direct deposit payroll, and cash management transfers via the
automated clearinghouse.
2. Laserpro - Utilized for preparation of loan documents.
3. Word and Wordperfect - Utilized for word processing.
4. IPS shareholder - Utilized for maintaining shareholder records.
5. FTI - Utilized for preparation of deposit account legal documents.
6. Excel/Lotus - Utilized for spreadsheet applications.
7. Access - Utilized for database applications.
8. Equifax - Utilized for credit card and merchant processing.
9. ADP - Payroll processing.
Other Operating Systems
Management has evaluated other operating systems, including HVAC and
security. Commerce National recently updated its building security system to
achieve Y2K compliance. In January, 1999, Commerce National also implemented a
new telephone and voicemail system which is Y2K compliant. The building has all
electric utilities and is served by American Electric Power.
Customer Y2K Evaluation
In the fourth quarter of 1998, management completed a review of all
customers with aggregate loans of $250,000 or more to assess whether any
customer had a significant risk to a Y2K related failure which would
significantly impact their business, and hence their ability to repay their
loans to Commerce National.
17
<PAGE> 22
Management's procedures included a review of the customers' most recent loan
grading, review of collateral and, in some cases, completion of a detailed Y2K
questionnaire which was reviewed directly with the borrower. Based on this
information, management assigned an overall Y2K risk grade of low, medium or
high. In the aggregate, Commerce National rated its overall risk due to
potential customer Y2K issues as low. Individual borrowers rated medium or high
will continue to be monitored as new loan requests or line of credit renewals
are considered for approval by loan committee.
Management's Current Forecast of a "Worst Case" Scenario
Commerce National is confident that its internal systems will not be
significantly affected by Y2K. However, management does anticipate that some
problems will occur with customers' systems and with their suppliers and
customers. Commerce National anticipates some potential for slower collection of
receivables by some of its customers, which would result in increased usage of
existing lines of credit and/or a decrease in savings balances. Commerce
National will maintain higher levels of liquidity in the second half of 1999
through 2000 to offset this risk. Commerce National also will enhance controls
over line of credit advances to monitor the line usage by its customers.
Commerce National's customers are minimally impacted by issues related to Y2K
issues of foreign nations or companies.
Y2K Costs
Many of Commerce National's initiatives to update and improve IT and other
systems relates to improved operating processes and customer service. We
consider these expenditures as being "indirectly" impacted by Y2K. Therefore, we
have listed those costs we consider a "direct" result of Y2K and those that we
consider "indirect." All personnel costs are estimates of time expended by
existing Commerce National employees. No outside consultants or contractors have
been utilized.
<TABLE>
<S> <C>
Direct Costs
Y2K testing of D3000 - Personnel costs.................... $ 7,000
D3000 - Travel and other expenses......................... 3,000
Y2K testing all other systems - Personnel costs........... 9,000
Replace bank security system.............................. 3,000
Upgrade PC operating systems.............................. 5,000
--------
Total Direct Costs.......................................... $ 27,000
========
Indirect Costs
New telephone system...................................... $ 50,000
New Items Processing software/equipment................... 200,000
--------
Total Indirect Costs........................................ $250,000
========
</TABLE>
All of the direct costs have been incurred as of December 31, 1998. Management
anticipates all indirect costs will be incurred during the first quarter of
1999. All indirect costs will be capitalized equipment costs and depreciated
over their appropriate useful lives. Estimated direct costs to be incurred in
1999 are expected to be less than $15,000.
DISTRIBUTION OF BALANCE SHEET ITEMS; INTEREST RATES AND INTEREST DIFFERENTIAL
The following tables set forth certain information relating to CNBC's
average balance sheets and the statements of income for the years ended December
31, 1998, 1997, and 1996, and reflects the average yield on assets and average
cost of liabilities for the periods indicated . Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average
18
<PAGE> 23
balances are derived from average daily balances. The yields and costs include
fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Money market funds,
federal funds sold
and interest earning
deposits............. $ 13,444 $ 715 5.32% $ 6,723 $ 357 5.31% $ 8,123 $ 415 5.11%
Securities available
for sale, net........ 5,149 302 5.87 3,543 213 6.01 3,511 223 6.35
Loans, net(1).......... 131,048 11,710 8.94 100,237 9,160 9.14 77,369 7,041 9.10
-------- ------- ----- -------- ------ ----- ------- ------ -----
Total
interest-earning
assets.......... 149,641 12,727 8.51 110,503 9,730 8.81 89,003 7,679 8.63
------- ----- ------ ----- ------ -----
Non-interest earning
assets............... 7,739 6,148 4,143
-------- -------- -------
Total assets....... $157,380 $116,651 $93,146
======== ======== =======
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing
liabilities:
NOW deposits........... $ 10,544 $ 192 1.82% $ 7,130 $ 147 2.06% $ 4,986 $ 103 2.07%
Savings deposits....... 49,191 2,135 4.34 29,907 1,270 4.25 23,437 985 4.20
Certificates of
deposit.............. 56,975 3,278 5.75 46,410 2,720 5.86 38,838 2,302 5.93
-------- ------- ----- -------- ------ ----- ------- ------ -----
Total deposits..... 116,710 5,605 4.80 83,447 4,137 4.96 67,261 3,390 5.04
Borrowed funds........... 9,348 616 6.59 7,473 487 6.52 5,012 314 6.26
-------- ------- ----- -------- ------ ----- ------- ------ -----
Total
interest-bearing
liabilities..... 126,058 6,221 4.94 90,920 4,624 5.09 72,273 3,704 5.13
------- ----- ------ ----- ------ -----
Other non-interest
bearing
liabilities.......... 19,992 16,592 12,955
Total
liabilities..... 146,050 107,512 85,228
Shareholders' equity... 11,330 9,139 7,918
======== ======== =======
Total liabilities
and
shareholders'
equity.......... $157,380 $116,651 $93,146
======== ======== =======
Net interest
income/interest rate
spread(2).............. $ 6,506 3.57% $5,106 3.72% $3,975 3.50%
======= ===== ====== ===== ====== =====
Net interest margin(3)... 4.35% 4.62% 4.47%
===== ===== =====
Ratio of interest-earning
assets to
interest-bearing
liabilities............ 118.7% 121.5% 123.1%
===== ===== =====
</TABLE>
- ---------------
(1) Amount is net of deferred loan fees and includes non-performing loans.
(2) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
RATE/VOLUME ANALYSIS
The following table represents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected CNBC's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (change in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume) and (iii) the net change. Changes attributable to the combined
impact
19
<PAGE> 24
of volume and rate have been allocated proportionately to separately reflect the
changes due to the volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ---------------------------
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
---------------------------- ---------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------ ------- ------- ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Money market funds, federal funds
sold and interest earning
deposits......................... $ 357 $ 1 $ 358 $ (74) $ 16 $ (58)
Securities available for sale,
net............................ 94 (5) 89 2 (12) (10)
Loans receivable, net(1)............ 2,757 (207) 2,550 2,090 29 2,119
------ ----- ------ ------ ---- ------
Total interest-earning
assets.................... 3,208 (211) 2,997 2,018 33 2,051
------ ----- ------ ------ ---- ------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW deposits........................ 64 (19) 45 44 -- 44
Savings deposits.................... 836 29 865 275 10 285
Certificates of deposit............. 609 (51) 558 444 (26) 418
------ ----- ------ ------ ---- ------
Total deposits.............. 1,509 (41) 1,468 763 (16) 747
Borrowed funds...................... 123 6 129 160 13 173
------ ----- ------ ------ ---- ------
Total interest-bearing
liabilities............... 1,632 (35) 1,597 923 (3) 920
------ ----- ------ ------ ---- ------
Net Interest Income................... $1,576 $(176) $1,400 $1,095 $ 36 $1,131
====== ===== ====== ====== ==== ======
</TABLE>
- ---------------
(1) Amount is net of deferred loan fees and includes non-performing loans.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of Commerce National's asset/liability management
("A/L mgt") is to provide for a stable net interest margin which is the primary
component of Commerce National's revenues. The objective of A/L mgt is to
monitor the amount of assets with variable and fixed rates and fund them with
similar liabilities. This process affects loan pricing and prepayment decisions
as well as deposit and borrowing interest rates. Guidelines for A/L mgt have
been established by the Funds Management Committee of the Board of Directors and
a review is completed on a monthly basis.
The following GAAP table summarizes Commerce National's dollar amount of
assets and liabilities, in thousands which either mature or have an interest
rate which will adjust within the timeframes noted. At December 31, 1998, total
interest-earning assets exceed interest-bearing liabilities by $25,347,000.
These assets are funded by non-interest bearing checking account balances and
Commerce National's capital.
<TABLE>
<CAPTION>
WITHIN 91 DAYS OVER 1 YEAR OVER 3 YEARS
CATEGORY 90 DAYS TO 1 YEAR TO 3 YEARS TO 5 YEARS OVER 5 YEARS
-------- -------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Loans............................ $ 49,288 $24,617 $36,958 $32,791 $7,510
Investments...................... 14,181 0 3,059 0 218
-------- ------- ------- ------- ------
Total............................ $ 63,469 $24,617 $40,017 $32,791 $7,728
Liabilities
Deposits......................... $ 93,621 $23,692 $13,325 $ 111 $ 0
Borrowings....................... 2,072 466 2,326 3,676 3,845
-------- ------- ------- ------- ------
Total............................ $ 95,693 $24,158 $15,651 $ 3,787 $3,845
-------- ------- ------- ------- ------
Net Position..................... $(32,224) $ 459 $24,366 $29,004 $3,883
======== ======= ======= ======= ======
</TABLE>
20
<PAGE> 25
At December 31, 1998, 80% of Commerce National's loans had interest rates which
adjust at least once every five years. Approximately 50% of these variable rate
loans will re-price in one year or less. Variable rate loans use either prime
rate or U.S. Treasury rates as the index which dictates changes in the loan
interest rate. Deposits and borrowings interest rates are primarily influenced
by changes in U.S. Treasury rates.
Commerce National uses an interest rate risk projection model which
calculates the potential change in its net interest income over the succeeding
one-year period which would result from an instantaneous and sustained interest
rate change of plus or minus 1.00% and 2.00%. Different assumptions are made
regarding anticipated loan prepayments depending on the direction and magnitude
of the interest rate change. At December 31, 1998, management's projection model
estimates that Commerce National's net interest income over the succeeding
one-year period would be affected as follows:
<TABLE>
<CAPTION>
POTENTIAL CHANGE IN
BUDGETED NET INTEREST INCOME
(IN THOUSANDS)
---------------------------------
CHANGES IN INTEREST RATES DOLLAR CHANGE PERCENTAGE CHANGE
- ------------------------- ------------- -----------------
<S> <C> <C>
Up 2.00% $(552) (7.33)%
Up 1.00% $(274) (3.63)%
Down 1.00% $ 251 3.34%
Down 2.00% $ 421 5.60%
</TABLE>
DESCRIPTION OF BUSINESS
HISTORY
CNBC was incorporated in Ohio on August 23, 1996 for the purpose of
effecting a reorganization whereby Commerce National Bank, a national bank
established in 1991 and more fully described below, would become a wholly-owned
subsidiary of CNBC and CNBC would become a bank holding company as defined in
The Bank Holding Company Act of 1956, as amended. This reorganization was
completed effective November 30, 1996.
The bank holding company structure enables CNBC, in addition to owning and
operating Commerce National, to engage in business opportunities that are
determined by the Federal Reserve Board in its regulatory and supervisory
capacity to be so closely related to banking or managing a bank to be
permissible activities for a bank holding company. See "Supervision and
Regulation." As a result, CNBC will be able to offer a broader range of services
to its customers and to more effectively compete with the commercial banks in
its market area that have also reorganized into bank holding companies.
The concept for the formation of Commerce National arose from the
experience of Thomas D. McAuliffe, Chairman of the Board, President and Chief
Executive Officer, as a banker servicing the needs of small and medium-sized
business owners and the experience of the initial organizers and directors, who
were founders or top level executives in such businesses. Together, Commerce
National's organizers concluded that a community business bank would fill a need
in the market in that it would better serve such businesses and their owners,
along with self-employed professionals. The concept was developed into an
operating plan emphasizing a low overhead and expense structure, a staff of
experienced bankers, and the efforts of the officers and directors in the
community.
On March 30, 1990, the organizers filed with the Office of the Comptroller
of the Currency an application to charter Commerce National. The Comptroller
granted preliminary approval of the application on August 22, 1990. On October
11, 1990, the Comptroller approved the offering circular for Commerce National's
initial stock offering. Commerce National closed the initial offering on April
12, 1991 after receiving and accepting subscriptions for 777,040 shares of
common stock at an adjusted per share price of $5.68, totalling $4,415,000.
Commerce National received its charter and commenced operations on June 7, 1991.
Commerce National offers customary commercial banking services to its
customers, including checking and savings accounts, electronic banking,
certificates of deposit, NOW accounts, and money market savings accounts.
21
<PAGE> 26
Commerce National also offers business lines of credit and term loans, primarily
on a secured basis, and real estate loans. For consumers, many of whom are the
owners of the businesses serviced by Commerce National, Commerce National offers
residential real estate loans, home equity loans and personal loans. The
deposits of Commerce National are insured by the FDIC up to applicable limits.
Commerce National is a member of the Federal Reserve System.
MARKET AREA
Commerce National's only office is located in a general purpose office
building at 100 East Wilson Bridge Road, Worthington, Ohio 43085, which was
purchased by Commerce National on June 1, 1997. Commerce National serves
customers primarily within and up to ten miles outside the Columbus outerbelt
(I-270). For purposes of The Community Reinvestment Act, Commerce National's
market area is defined as Franklin and southern Delaware counties. In excess of
90% of Commerce National's loan business and in excess of 75% of Commerce
National's deposits have been generated from customers in this market area. For
a further discussion on the Community Reinvestment Act see "Supervision and
Regulation."
COMPETITION
All phases of Commerce National's business are highly competitive. Commerce
National competes with local commercial banks, many of which have assets,
capital and lending limits substantially larger than Commerce National. Commerce
National also competes with savings banks, savings and loan associations, money
market funds, insurance companies, stock brokerage firms, regulated small loan
companies, credit unions and issuers of commercial paper and other securities.
Recent Ohio and other legislation has had the effect of facilitating the ability
of financial institutions located outside Ohio to enter Ohio markets, thereby
increasing competition.
As of June 30, 1998, there were 26 FDIC-insured financial institutions with
operations in the Franklin County market, ranging in asset size from $6.5
billion to less than $1 million. The four largest financial institutions control
approximately 79% of the deposits in Franklin County. As of June 30, 1998, the
most recent date for which figures are available, total deposits in Franklin
County were approximately $17.4 billion. Listed below is information on all
FDIC-insured financial institutions with deposits in Franklin County exceeding
$50 million. Total deposits and number of offices are for Franklin County only.
<TABLE>
<CAPTION>
NUMBER TOTAL DEPOSITS
BANK NAME OF OFFICES (IN MILLIONS)
--------- ---------- --------------
<S> <C> <C>
Bank One.................................................... 46 $6,463
Huntington National Bank.................................... 53 3,094
Fifth/Third Bank of Columbus................................ 60 2,647
National City Bank.......................................... 51 1,539
Firstar..................................................... 33 917
Bank One Trust Company...................................... 1 883
Key Bank N.A................................................ 20 593
Ohio Savings Bank, F.S.B.................................... 5 254
First National Bank of Zanesville........................... 6 165
Commerce National Bank...................................... 1 146
Heartland Bank.............................................. 5 109
Union Savings Bank.......................................... 2 88
First Community Bank........................................ 2 71
World Financial Network National Bank....................... 1 61
Wheeling National Bank...................................... 4 51
</TABLE>
22
<PAGE> 27
Total banking deposits in Delaware County were $583 million at June 30,
1998. The dominant banks in Delaware County are The Delaware County Bank and
Trust, which controls 53% of deposits, and National City Bank, which controls
17% of deposits.
In competing for money market and time deposits, Commerce National
generally offers interest rates comparable to its competitors. Borrowers are
actively encouraged to use Commerce National as their primary depository
institution.
The primary means of introducing and promoting Commerce National's loan
products is through the business and personal contacts of the directors and
officers in Commerce National's market area and referrals from existing
customers.
Following are several of CNBC's and Commerce National's organizational
philosophies that management believes have made Commerce National effective in
competing for and obtaining new business:
- Serving the small business owner with an experienced banker. The eight
individual account officers at Commerce National average 20 years of
banking experience. Typical problems that small business owners encounter
with larger banks include inexperienced account officers and turnover in
the account officer relationship. Commerce National offers the small
business owner an opportunity to work with an experienced professional on
a long term basis.
- Responsiveness to customer needs. The lending approval "hierarchy" in a
large bank often dictates a time frame that is too long before a decision
can be made on a borrowing request. Commerce National has developed
lending authorities and committee schedules to permit prompt decisions on
borrowing requests. All lending decisions are made by Commerce National
at a local level.
- Cost control. Commerce National has adopted a philosophy of only
providing the banking services which are needed by small businesses and
their owners. Commerce National currently has only one office, without a
drive-through facility. A third party courier service is utilized to pick
up customer deposits in lieu of an extensive branch network. This
strategy allows Commerce National to allocate much of its resources to
quality people and offer very competitive rates for both loans and
deposits. Commerce National is also a member of the MAC and Money Station
ATM networks. This membership provides Commerce National's customers with
the ability to withdraw or deposit funds at over 150 ATM machines in the
Columbus, Ohio metropolitan area.
CURRENT SERVICES
Commerce National is a full service bank serving primarily the financing
and cash management needs of small to medium-sized business customers in the
central Ohio region. Commerce National does not currently offer trust services.
Banking deposit products include checking and savings accounts, certificates of
deposit, money market savings accounts, and NOW accounts. The certificates of
deposit offered have various maturities ranging from seven days to five years.
Commerce National offers business lines of credit and term loans, primarily
on a secured basis, and real estate loans. For consumers, many of whom are the
owners of the businesses serviced by Commerce National, Commerce National offers
residential real estate loans, home equity loans and personal loans.
Commerce National also offers credit cards to businesses and consumers,
merchant processing services to businesses and international wire and check
clearing services.
Commerce National endeavors to build relationships with select small and
medium-sized businesses in its market area. Loan customers are encouraged to
bring their deposit business to Commerce National. This focus has further
increased the deposit base for Commerce National and assists in controlling
overall marketing costs related to deposit acquisition.
Under the National Bank Act, Commerce National is generally prohibited from
lending and/or extending credit to any one person at any one time in excess of
15% of the unimpaired capital and unimpaired surplus of Commerce National, plus
an additional 10% where the loan is fully secured by readily marketable
collateral. If
23
<PAGE> 28
the needs of a loan customer exceed Commerce National's lending limit, Commerce
National may sell loan participations to other banks. In all cases where
participation of a loan is required by Commerce National's underwriting policies
or applicable law, participation commitments are obtained before a loan
commitment is made to a borrower. The participation of loans serves to limit
concentrations in the loan portfolio while enabling Commerce National to meet
customer needs.
LENDING
Commerce National has experienced high loan demand since its inception.
This demand has primarily been the result of the contacts of the officers and
directors in the community and an expanding local economy.
Commerce National classifies its loans according to the following
categories:
Residential Real Estate Loans. This category includes loans secured by a
first mortgage on an individual's principal residence. Loans are typically
underwritten with a loan-to-appraised value of 85% or less and compliance with
certain income-to-debt ratios. The vast majority of these loans are to the
owners of the businesses for which Commerce National provides services.
Management considers the overall loan loss risk of these types of loans to be
minimal.
Real Estate Construction Loans. This category includes construction loans
for owner-occupied commercial real estate, an individual's principal residence
or real estate investment property. Construction loans for an individual's
principal residence are underwritten similarly to a residential real estate
loan. Construction loans for commercial purposes are typically written with a
loan-to-appraised value of 80% or less and compliance with cash flow and
underwriting guidelines based on the income generated by the business that will
occupy the building. Construction loans for real estate investment purposes are
typically written with a loan-to-appraised value of 75% or less and compliance
with cash flow and underwriting guidelines based on the projected income
generated by the rental of the property. Depending on the financial strength of
the borrower, a certain amount of committed leases may also be required to
approve the loan. Management considers the overall loan loss risk of these types
of loans as moderate to high.
Real Estate Investment Loans. This category includes loans secured by
commercial real estate that is occupied by a Commerce National business
customer, residential investment property such as condominiums and apartments,
and commercial investment real estate that is leased to businesses which are not
Commerce National customers. At December 31, 1998, total real estate investment
loans were distributed as follows:
<TABLE>
<S> <C>
Owner occupied commercial real estate....................... 18%
Residential investment property............................. 56%
Commercial investment property.............................. 26%
</TABLE>
Loans for commercial real estate are typically written with a loan to appraised
value of 75% or less and compliance with cash flow and underwriting guidelines
based on the income generated by the business or businesses that will occupy the
building. Loans for residential investment property are typically written with a
loan-to-appraised value of 80% or less and compliance with cash flow and
underwriting guidelines based on the projected income generated by the rental of
the property. Maturities generally range from 10 to 25 years. Management
considers the overall loan loss risk of residential investment property as low
and owner-occupied and commercial investment property as low to moderate.
Business Loans. This category includes lines of credit and term loans
primarily secured by accounts receivable, inventory, equipment and other
business assets. Maturities on term notes generally do not exceed five years.
Management reviews the cash flow and financial condition of the business
compared to established guidelines in determining whether to approve business
loans. Management considers the overall loan loss risk of business loans as
moderate.
Personal Loans. These loans are made to individuals and include home equity
loans, stock secured loans, loans to purchase vacation homes and other loans.
Underwriting approval procedures depend on the type of loan and include criteria
for loan to collateral value guidelines and income-to-debt ratios. Management
considers the overall loan loss risk of personal loans as low.
24
<PAGE> 29
The following table presents a summary of CNBC's loan portfolio by category
for each of the last five years. Other than the categories noted, there is no
concentration of loans in any industry greater than 5% in the portfolio. CNBC
has no foreign loans in its portfolio.
LOAN PORTFOLIO
COMPOSITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans........... $ 21,234 14.05% $ 18,871 15.88% $18,028 20.83%
Real estate construction loans.......... 9,904 6.55% 4,790 4.03% 1,528 1.77%
Real estate investment loans............ 55,572 36.76% 42,967 36.15% 29,197 33.74%
Business loans.......................... 54,239 35.88% 42,457 35.72% 29,895 34.55%
Personal loans.......................... 10,215 6.76% 9,771 8.22% 7,881 9.11%
-------- ----- -------- ----- ------- -----
Gross loans............................. 151,164 100% 118,856 100% 86,529 100%
===== ===== =====
Less:
Deferred fees, net...................... 228 178 178
Allowance for loan losses............... 2,055 1,600 1,264
-------- -------- -------
Total loans, net........................ $148,881 $117,078 $85,087
======== ======== =======
</TABLE>
Management performs an analysis of Commerce National's loan portfolio on a
quarterly basis to assess the adequacy of the allowance for loan losses. The
allowance for loan losses represents that amount which management estimates is
adequate to provide for inherent losses in its loan portfolio. The allowance
balance and the provision charged to expense are determined by management based
upon past loan loss experience, economic conditions and various other
circumstances that are subject to change over time. The collectibility of
certain specific loans is evaluated based upon factors including the financial
position of the borrower, the estimated market value of the collateral at the
current time, guarantees, and Commerce National's collateral position versus
other creditors. Historical loss information and local economic conditions are
considered in establishing allowances on the remaining portfolio. The allowance
is reduced by charging off loans deemed uncollectible by management. The
allowance is increased by provisions charged to expense and recoveries of
previous charge-offs. After a loan is charged off, collection efforts continue.
While management of Commerce National places a strong emphasis on proper
loan underwriting and loan review procedures and has, to date, experienced low
levels of loan charge-offs, management has continued to increase its allowance
for loan losses due to its loan growth. Several factors make it more difficult
for Commerce National to quantify its allowance for loan losses than other
banks. These factors are as follows:
- The overall age of Commerce National is still only 7 years, during which
time the local economy has not experienced any significant recessionary
periods;
- Due to its small business focus, Commerce National's average loan size is
much larger than other similarly sized banks.
- Since its inception, Commerce National has grown substantially,
especially the last 2 years and, typically, loan quality problems take at
least several years to materialize; and
- Commerce National's short history makes projecting loan losses based on
historical experience less reliable than other banks, which is one of the
measurement techniques utilized by the industry in assessing allowance
for loan loss levels.
25
<PAGE> 30
SUMMARY OF LOAN LOSS EXPERIENCE
The following table sets forth activity in Commerce National's allowance
for loan losses for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.................. $1,600 $1,264 $1,010 $ 725 $503
Provision for loan losses....................... 480 386 254 288 252
Charge-offs:
Residential real estate loans.................
Real estate construction loans................
Real estate investment loans..................
Business loans................................ 25 50 4 30
Personal loans................................
------ ------ ------ ------ ----
Total charge-offs..................... 25 50 -- 4 30
Recoveries:
Residential real estate loans.................
Real estate construction loans................
Real estate investment loans..................
Business loans................................ 1
Personal loans................................
------ ------ ------ ------ ----
Total recoveries...................... -- -- -- 1 --
------ ------ ------ ------ ----
Net charge-offs................................. 25 50 -- 3 30
------ ------ ------ ------ ----
Balance at end of period........................ $2,055 $1,600 $1,264 $1,010 $725
====== ====== ====== ====== ====
</TABLE>
The following tables set forth an allocation for the allowance for loan
losses by category of loan and the percentage of total loans configured by that
category. In making the allocation, consideration was given to such factors as
management's evaluation of risk in each category, current economic conditions
and charge-off experience. An allocation for the allowance for loan losses is an
estimate of the portion of the allowance that will be used to cover future
charge-offs in each major loan category, but it does not preclude any portion of
the allowance allocated to one type of loan being used to absorb losses of
another loan type.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
% OF % OF % OF
TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Business and real estate investment.... $1,347 72.6% $1,052 71.9% $ 733 68.3%
Real estate construction............... 122 6.6 59 4.0 20 1.8
Residential real estate................ 58 14.0 51 15.9 45 20.8
Personal............................... 77 6.8 70 8.2 59 9.1
Unallocated............................ 451 368 407
------ ----- ------ ----- ------ -----
Total........................ $2,055 100.0% $1,600 100.0% $1,264 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
26
<PAGE> 31
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 1998. Maturities are
based upon contractual terms. Commerce National's policy is to specifically
review and approve any loan renewed; no loans are automatically rolled over.
LOAN MATURITIES AND INTEREST SENSITIVITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ONE YEAR ONE THROUGH OVER TOTAL
OR LESS FIVE YEARS FIVE YEARS LOANS
-------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Business....................................... $42,525 $64,050 $2,903 $109,478
Real estate construction....................... 9,904 -- -- 9,904
------- ------- ------ --------
Total................................ $52,429 $64,050 $2,903 $119,382
======= ======= ====== ========
Fixed rate loans............................... $ 2,716 $12,123 $2,731 $ 17,570
Floating rate loans............................ 49,713 51,927 172 101,812
------- ------- ------ --------
Total................................ $52,429 $64,050 $2,903 $119,382
======= ======= ====== ========
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets consist of loans on which interest is no longer
accrued, certain restructured loans where interest rate or other terms have been
renegotiated, accruing loans past due 90 days or more and real estate acquired
through foreclosure.
CNBC discontinues the accrual of interest on loans that become 90 days past
due as to principal or interest unless they are adequately secured and in the
process of collection. A loan remains in a nonaccrual status until doubts
concerning collectibility no longer exist. A loan is classified as a
restructured loan when the interest rate is materially reduced or the term is
extended beyond the original maturity date because of the inability of the
borrower to service the loan under the original terms. Other real estate is
recorded at the lower of cost or fair value less estimated costs to sell.
The following table sets forth information regarding non-accrual loans and
other nonperforming assets.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1998 1997 1996
----- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans:
Residential real estate loans..........................
Real estate investment loans...........................
Business loans......................................... $ 80 $100
Personal loans.........................................
---- ---- -----
Total non-accrual loans................................ 80 100
Loans contractually past due 90 days or more, other than
non-accruing..............................................
---- ---- -----
Total non-performing loans.................................. $ 80 $100 $ 0
==== ==== =====
Allowance for loan losses as a percentage of loans.......... 1.36% 1.35% 1.46%
==== ==== =====
Allowance for loan losses as a percentage of total
non-performing loans...................................... 2568% 1600% (1)
==== ==== =====
Non-performing loans as a percentage of loans............... .05% .08% .00%
==== ==== =====
</TABLE>
- ---------------
(1) Not applicable.
27
<PAGE> 32
The Board reviews all loans on non-accrual and all loans 90 days or more
delinquent on a monthly basis. The additional amount of interest income that
would have been recorded on non-accrual loans, had they been current, totaled
$11,800 and $7,400 for 1998 and 1997. In addition to the loans noted above,
management maintains a "watch" loan report to monitor the condition of borrowers
that exhibit certain weaknesses in their profitability or financial condition.
In the opinion of management, a total of $876,000 in watch loans could be
potential problem loans in the future.
SECURITIES PORTFOLIO
Commerce National has maintained a loan to deposit ratio of approximately
97% since its inception. As a result, Commerce National's reliance on its
securities portfolio as a primary income source is lower relative to other
banks. Management stresses safety and liquidity with respect to its investment
decisions. Commerce National has maintained its portfolio in federal funds sold,
money market mutual funds, short term deposits with the Federal Home Loan Bank
and U.S. Treasury securities with maturities of less than two years. Management
foresees no significant change in its philosophy of safety and liquidity to
foster adequate liquidity for loan demand and unforeseen deposit withdrawal
needs.
The following table sets forth certain information regarding the amortized
cost and carrying values of Commerce National's debt and equity and securities
at the dates indicated.
CARRYING VALUE OF SECURITIES
(dollars in thousands)
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1998 1997
--------------------- ---------------------
AMORTIZED CARRYING AMORTIZED CARRYING
COST VALUE COST VALUE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale
Debt securities:
U.S. Government obligations...................... $3,791 $3,811 $2,746 $2,744
Equity securities:
Federal Reserve Bank stock......................... 218 218 218 218
FHLB stock......................................... 1,190 1,190 1,089 1,089
------ ------ ------ ------
Total equity securities............................ 1,408 1,408 1,307 1,307
------ ------ ------ ------
Total securities, available for-sale............. $5,199 $5,219 $4,053 $4,051
====== ====== ====== ======
</TABLE>
MATURITY DISTRIBUTION OF AVAILABLE FOR SALE SECURITIES AT DECEMBER 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
ONE YEAR ONE THROUGH EQUITY
OR LESS FIVE YEARS SECURITIES TOTAL
-------- ----------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies.............. $752 $3,059 $ 0 $3,811
Other securities................................ 0 0 1,408 1,408
---- ------ ------ ------
Total securities................................ $752 $3,059 $1,408 $5,219
==== ====== ====== ======
Percent of total................................ 14.4% 58.6% 27.0% 100%
Weighted average yield.......................... 6.14% 5.15% 7.01% 5.79%
</TABLE>
DEPOSITS
Since its inception, Bank management has followed a growth strategy which
was primarily driven by the amount of good quality loans which it could
responsibly fund. This strategy has resulted in loan growth which has outpaced
deposit growth from its primary customer base. Additionally, Commerce National's
primary
28
<PAGE> 33
customer base has a strong preference for liquidity, which results in a
preference for short term Certificate of Deposit maturities and money market
savings accounts versus longer term Certificates of Deposit. As a result of
these factors, Commerce National has accepted Certificates of Deposit from
customers outside its designated market area which are solicited through a
national rate listing network. While only some of these deposits are placed
through a deposit broker, CNBC has elected to list all such funds as "Brokered
certificates of deposit" in the following table. Any brokerage fees or
commissions for such deposits are paid for by the depositor, not Commerce
National.
Utilization of these deposits has the following benefits to Commerce
National:
- Generates longer term funding for Commerce National not generally
available from its primary customers;
- Maintains Commerce National's efficiency due to accepting only deposits
of $99,000 or greater; and
- Permits Commerce National to fund loans at a higher growth rate than
would otherwise have been feasible based on the deposit growth from its
targeted customer base.
The following table sets forth the distribution of CNBC's average deposit
accounts and the related weighted average interest rates on each category of
deposit presented at the dates indicated. CNBC has no deposits in foreign
banking offices.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
accounts.................... $ 19,214 -- $16,254 -- $12,462 --
NOW accounts.................. 10,544 1.82% 7,130 2.06% 4,986 2.07%
Savings and money market
accounts.................... 49,191 4.34 29,907 4.25 23,437 4.20
Certificates of deposit....... 26,350 5.49 24,959 5.66 20,780 5.76
Brokered certificates of
deposit..................... 30,625 5.98 21,451 6.09 18,058 6.12
-------- ---- ------- ---- ------- ----
Total............... $135,924 4.12% $99,701 4.15% $79,723 4.25%
======== ==== ======= ==== ======= ====
</TABLE>
The following table summarizes certificates of deposit in amounts of
$100,000 or more as of December 31, 1998, by time remaining until maturity, in
thousands:
<TABLE>
<S> <C>
Under 3 months.............................................. $10,490
3 to 6 months............................................... 5,141
6 to 12 months.............................................. 5,154
Over 12 months.............................................. 6,187
-------
$26,972
=======
</TABLE>
PERSONNEL
As of December 31, 1998, CNBC had 41 full-time equivalent employees. None
of CNBC's employees is represented by a collective bargaining agreement.
Management considers its relations with its employees to be excellent.
29
<PAGE> 34
AVAILABLE INFORMATION
CNBC is not currently a reporting company pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), but will be required to
file reports pursuant to the Exchange Act following the completion of the
offering. You may read and copy any materials filed with the SEC at the SEC's
Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information regarding the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The SEC internet site
can be found at http://www.sec.gov. CNBC, which has a December 31 fiscal year
end, intends to furnish its shareholders with annual reports containing audited
financial information and, for the first three quarters of each year, quarterly
reports containing unaudited financial information.
Requests for such documents should be directed to John Romelfanger, Vice
President, CNBC Bancorp, 100 East Wilson Bridge Road, Suite 100, Worthington,
Ohio 43085.
DESCRIPTION OF PROPERTY
CNBC and Commerce National are located at CNBC's only current facility at
100 East Wilson Bridge Road, Worthington, Ohio. Management has determined that
Commerce National is able to provide quality service to its customers from its
current location.
Commerce National's main office is located in a 24,250 square foot general
purpose office building. Commerce National currently utilizes approximately 40%
of the building, with the remaining space leased by companies independent of
Commerce National. During early 1996, the previous owner of the building, in
accordance with a provision in Commerce National's lease, notified Commerce
National that the building was for sale and that Commerce National had the right
to make the first offer to buy the building. It was the consensus of the Board
of Directors and management of Commerce National that an offer should be made to
purchase the building. The purchase of the building was completed on June 1,
1997. Commerce National leased its space in the building from October 15, 1995
to June 1, 1997. Prior to October 15, 1995, Commerce National leased office
space in another building approximately 3 miles from its current location.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1998, there were 1,116,972 common shares outstanding, held
by approximately 400 shareholders. In addition, at such date, there were 59,520
warrants outstanding and 162,830 stock options outstanding. See "Dividend
Policy" for a discussion of cash dividends declared for each of the last 2
fiscal years.
The following is a brief history of the stock sales of Commerce National
and CNBC. All per share amounts and number of shares sold have been adjusted to
reflect 2-for-1 stock splits paid in January, 1998 and April, 1993 and a 10%
stock dividend paid in January, 1995.
Commerce National received and accepted during its initial stock offering,
subscriptions for 777,040 shares of common stock at an adjusted per share price
of $5.68, totalling $4,415,000. In connection with Commerce National's initial
stock offering in 1990, 77,520 warrants were issued to all shareholders. Each
warrant is fully transferable and entitles the holder to purchase a common
shares at $5.68 per share. The warrants will expire on October 10, 2000, and are
subject to adjustments for stock splits, stock dividends and similar
transactions. In connection with Commerce National's holding company formation,
all Bank warrants were exchanged for identical CNBC warrants. Through December
31, 1998, 18,015 warrants have been exercised.
In December, 1991, Commerce National completed a private placement of 5,280
shares at an adjusted price of $6.82 per share.
Commerce National initiated a second stock offering in December, 1991 to
supplement its capital at an adjusted price of $6.82 per share. This offering
was closed in June, 1992 after subscriptions for 111,030.4 shares had been
submitted and accepted, totalling $757,020.
30
<PAGE> 35
Commerce National initiated a third stock offering in December, 1993 at an
adjusted price of $8.18 per share. This offering was closed in early 1994 after
subscriptions for 151,800 shares were accepted, totalling $1,242,000.
CNBC initiated a stock offering in October, 1997 at an adjusted price of
$20 per share. This offering was closed in November, 1997 after subscriptions
for 50,000 shares were accepted, totaling $1,000,000.
Additionally, 3,840 shares have been issued pursuant to the exercise of
stock options at various prices and 18.4 shares of stock were redeemed in
November, 1996 due to the holding company reorganization, at $15.00 per share.
A Columbus, Ohio broker, Sweney, Cartwright & Co., currently makes a market
in the common shares, but does not maintain information concerning high and low
bids on a quarterly basis. The following table shows the average per share price
and total number of common shares sold by Sweney, Cartwright & Co. to individual
investors. These sales do not include transactions that may have been completed
directly between a buyer and seller, as to which CNBC has no information. All
information was provided by Sweney, Cartwright & Co.
<TABLE>
<CAPTION>
KNOWN PRICE NUMBER OF
RANGE(2)(3) SHARES TRANSFERRED(1)(2)
------------- ------------------------
<S> <C> <C>
Calendar year 1998 $25.00-$29.50 7,050
Calendar year 1997 $15.50-$20.00 4,962
Calendar year 1996 $15.00-$15.37 4,400
Calendar year 1995 $ 8.92-$10.68 27,770
Calendar year 1994 $ 8.41-$ 8.86 42,834
Calendar year 1993 $ 7.73-$ 7.84 11,000
</TABLE>
- ---------------
(1) Reflects shares transferred where Sweney, Cartwright & Co. has knowledge of
the price in the transaction.
(2) As adjusted for 10% stock dividend paid in January, 1995, and 2-for-1 stock
splits effective in January, 1998 and April, 1993.
(3) Price includes broker's fees charged by Sweney, Cartwright & Co.
SUPERVISION AND REGULATION
CNBC is a bank holding company subject to the supervision of and
examination by the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act of 1956. As a bank holding company, CNBC must file an
annual report with the Board of Governors. The Board of Governors expects every
bank holding company to serve as a source of strength for its subsidiary banks.
As a bank holding company subject to regulation by the Federal Reserve,
CNBC must comply with policy statements issued by the Federal Reserve. The
Federal Reserve policy statement governing payment of cash dividends provides
that a bank holding company should not pay cash dividends on common stock
unless:
- the organization's net income for the past year is sufficient to fully
fund the dividends, and
- the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial
condition.
Moreover, regulatory authorities are authorized to prohibit banks and bank
holding companies from paying dividends if payment of dividends would constitute
an unsafe and unsound banking practice.
The Bank Holding Company Act requires every bank holding company to obtain
the prior approval of the Board of Governors before it may acquire substantially
all the assets of any bank, or 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.
31
<PAGE> 36
In addition, a bank holding company is generally prohibited from itself
engaging in, or acquiring direct or indirect control of voting shares of any
company engaged in nonbanking activities. One of the principal exceptions to
this prohibition is for activities found by the Board of Governors, by order or
regulation, to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
CNBC is an "affiliate" of Commerce National within the meaning of the
Federal Reserve Bank, which imposes restrictions upon:
- loans by Commerce National to CNBC;
- investments by Commerce National in the stock or the securities of CNBC;
and
- the use of CNBC common stock or securities of CNBC as collateral for
loans by Commerce National to any borrower.
Under current Federal Reserve guidelines, CNBC will be required to maintain
adequate capital in Commerce National. Commerce National's allowance for loan
losses and subordinated debt will be included subject to certain limitations and
intangible assets will be deducted in computing the level of Commerce National's
total capital. Commerce National is also subject to the capital adequacy
regulations of the Comptroller of the Currency. To be considered "adequately
capitalized," the required "leverage capital ratio" is 4%, the "tier 1
risk-based capital ratio" is 4%, and the "total risk-based capital ratio" is 8%.
To be "well capitalized," the foregoing requirements are 5%, 6%, and 10%,
respectively. Commerce National is considered to be "well capitalized" under the
foregoing standards. See Note 14 to the consolidated financial statements.
The commercial banking business is affected not only by general economic
conditions, but also by the monetary policies of the Federal Reserve. Some of
the instruments of monetary policy available to the Federal Reserve:
- changes in the discount rate on member bank borrowing,
- availability of borrowing at the "discount window,"
- open market operations,
- the imposition of and changes in reserve requirements against member
banks' deposits and assets of foreign branches, and
- the changes in reserve requirements against certain borrowings by banks
and their affiliates.
These monetary policies influence to a significant extent the overall
growth of bank loans, investments, and deposits and the interest rates charged
on loans or paid on time and savings deposits.
Commerce National is also subject to federal regulation as to such matters
as limitation as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirement by
Commerce National of its own securities and other aspects of banking operations.
In addition, the activities and operations of Commerce National are subject to a
number of additional detailed, complex and sometimes overlapping laws and
regulations. These include:
- state usury and consumer credit laws,
- state laws relating to fiduciaries,
- the Federal Truth in Lending Act and Regulation Z,
- the Real Estate Settlement and Procedures Act,
- the Federal Equal Credit Opportunity Act and Regulation B,
- the Federal Deposit Insurance Corporation Improvement Act of 1991,
- the Fair Credit Reporting Act,
- the Truth in Savings Act,
32
<PAGE> 37
- the Community Reinvestment Act,
- anti-redlining legislation, and
- antitrust laws.
Commerce National is a nationally chartered bank and is subject to the
direct supervision and regulation and is regularly examined by the Office of the
Comptroller of the Currency. Additionally, Commerce National is a member of the
Federal Reserve System and its deposits are insured by the FDIC to applicable
limits. Areas of operation subject to regulation by federal laws, regulations
and regulatory agencies include:
- terms on deposits,
- investments,
- loans,
- fiduciary activities,
- mergers,
- issuance of securities,
- payment of dividends,
- establishment of branches, and
- other aspects of operations.
As noted in this Prospectus under the Section entitled "Deposits" and in
Note 7 to the Consolidated Financial Statements, Commerce National has relied on
brokered certificates of deposit as a significant funding source for its growth
and to help maintain a proper asset/liability GAP position. Current regulations
would require Commerce National to receive regulatory approval to continue to
accept brokered certificates if its capital level fell below the "well
capitalized" category. Additionally, Commerce National would be prohibited from
accepting brokered certificates if its capital level fell below the "adequately
capitalized" category.
Commerce National is also subject to a variety of other laws that impose
limitations on loans to a single borrower, to insiders, and to others, and to
other laws which impose various requirements for certain types and classes of
loans.
The earnings of Commerce National, as a lender of money, is affected by
legislative changes and by policies of various regulatory authorities which are
periodically reviewed and updated.
New statutes and regulations, containing various plans for changes to the
structure, regulations and competitive relationships of the financial
institutions are regularly proposed. The Financial Services Competitiveness Act
will be re-introduced in the United States Congress this year. If adopted, this
legislation could significantly change the regulation of banks and the financial
services industry. Although some of the legislative and regulatory changes may
benefit us, others may increase our costs of doing business or have other
adverse effects on us and create competitive advantages for non-bank
competitors. We cannot predict whether the Financial Services Competitiveness
Act or any other legislation will be adopted or, if adopted, what effect these
would have.
Under Ohio law, the Merger Moratorium Act, enacted in 1990, prohibits
certain Ohio corporations from engaging in specified types of transactions with
an "interested shareholder" for a period of three years after the shareholder
becomes an "interested shareholder" unless the shareholder receives the approval
of the corporation's Board of Directors prior to the acquisition of shares or
the consummation of the specified type of transaction. The anticipated effect of
the Merger Moratorium Act is to encourage a potential acquiror to negotiate with
a target corporation's Board of Directors prior to obtaining a 10 percent or
greater block of shares in the corporation.
33
<PAGE> 38
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS
The Board of Directors for CNBC presently consists of seventeen elected
members. The maximum number of directors of CNBC has been fixed at twenty-five.
The directors of CNBC are divided into three classes with each class elected for
terms of three years so that at each Annual Meeting of the Shareholders of CNBC
the term of office of one class of directors expires. The members of the Board
of Directors of Commerce National are chosen by CNBC as Commerce National's sole
shareholder on an annual basis. All directors listed serve on the boards of CNBC
and Commerce National, except as noted. The following information provides a
summary of the composition of the Boards of Directors of CNBC and Commerce
National as of December 31, 1998. The following table sets forth the names, ages
(as of December 31, 1998) and positions with CNBC and Commerce National, the
year they first became a director and the year their current term expires. A
summary of the background and experience of each of these individuals is set
forth after the table.
<TABLE>
<CAPTION>
DIRECTOR CURRENT TERM
NAME AGE POSITION SINCE TO EXPIRE
---- --- -------- -------- ------------
<S> <C> <C> <C> <C>
Thomas D. McAuliffe.......... 49 Chairman of the Board, President
and Chief Executive Officer, Director.... 1990 1999
Loreto (Larry) V. Canini..... 35 Director................................. 1996 1999
Mark S. Corna................ 49 Director................................. 1990 2001
Jameson Crane, Jr............ 49 Director................................. 1991 1999
Judith A. DeVillers.......... 62 Director................................. 1991 2001
George A. Gummer............. 56 Director................................. 1990 1999
William L. Hoy............... 49 Director................................. 1990 1999
Douglas W. James (1)......... 56 Director................................. 1990 2001
Donald R. Kenney............. 55 Director................................. 1991 2001
Daniel M. Mahoney............ 45 Vice President, Senior Lending Officer,
Director................................. 1996 2001
Samuel E. McDaniel........... 53 Director................................. 1990 1999
Kent K. Rinker (2)........... 50 Non-elected Advisory Director............ 1990 N/A
Richard F. Ruhl.............. 61 Director................................. 1991 2000
David J. Ryan................ 56 Director................................. 1990 2001
Peter C. Taub (1)............ 55 Director................................. 1990 2000
John A. Tonti................ 53 Director................................. 1990 2000
Alan R. Weiler............... 65 Director................................. 1990 2000
Michael Wren (1)............. 56 Director................................. 1990 2000
</TABLE>
- ---------------
(1) Serve as CNBC directors only.
(2) Serves as a non-elected advisory director of CNBC only.
Thomas D. McAuliffe (49), Director (1990), is the chairman, president and
chief executive officer of Commerce National. Mr. McAuliffe has significant
involvement in lending and client development in addition to his administrative
duties. Mr. McAuliffe began organizing Commerce National Bank in January, 1990.
Mr. McAuliffe has over 20 years of banking experience and is a founding
organizer of Commerce National.
Loreto (Larry) V. Canini (35), Director (1996), is president of Canini and
Pellecchia, Inc., a residential construction and development company.
Mark S. Corna (49), Director (1990), is president of Corna/Kokosing
Construction Company, a commercial construction company. Mr. Corna is chairman
of Commerce National's compensation committee and is a founding organizer of
Commerce National.
34
<PAGE> 39
Jameson Crane, Jr. (49), Director (1991), is vice president of investments
for Fairwood Investments Co., an affiliate of Crane Plastics Co., a manufacturer
of thermo plastic extrusions, where he has been employed since 1974.
Judith A. DeVillers (62), Director (1991), is the chief executive officer
of the EXCO Company, a site development and excavating contractor founded in
1981. Ms. DeVillers is also president of INDEC, Inc., an interior design firm.
George A. Gummer (56), Director (1990), is the owner of G. A. Gummer &
Assoc., a registered investment advisor to banks, savings and loan associations
and other businesses, which he founded in 1981. Mr. Gummer is chairman of
Commerce National's funds management committee and is a founding organizer of
Commerce National.
William L. Hoy (49), Director (1990), is the chief executive officer of
Columbus Sign Company, a business now in its third generation of operation by
the Hoy family and Treasurer of Innocom Corp., a marketing graphics servicer.
Mr. Hoy is chairman of Commerce National's Audit Committee and a founding
organizer of Commerce National.
Douglas W. James (56), Director (1990), retired from Danka Industries,
Inc., a business equipment sales company in 1996. Previously, Mr. James was
owner and President of American Business Equipment, Inc., which was sold to
Danka in 1995. Mr. James is a founding organizer of Commerce National.
Donald R. Kenney (55), Director (1991), is chairman of Triangle Real Estate
Services, Inc. and the owner of Cross Country Inn Motels, Concourse Hotel, The
Sawmill and Westerville Athletic Clubs, Donald R. Kenney & Co. Realtors and
Millennium, Inc.
Daniel M. Mahoney (45), Director (1996), is a senior lending officer with
Commerce National. Mr. Mahoney joined Commerce National in September, 1990, and
has primary responsibility for lending and client development. Mr. Mahoney has
over 20 years of banking experience.
Samuel E. McDaniel (53), Director (1990), is president of McDaniel's
Painting and Construction, Inc., a general contractor, and owner of Redwood
Development Center, a small business incubator, and McDaniel's Property
Management. Mr. McDaniel is a founding organizer of Commerce National.
Kent K. Rinker (50), Non-elected Advisory Director (1990), is an investment
broker of Financial Assets Corp., an investment management firm. From 1981
through 1989, Mr. Rinker was a partner with the regional investment firm Meuse,
Rinker, Chapman, Endres & Brooks, of which he was a founder. Mr. Rinker is a
founding organizer of Commerce National.
Richard F. Ruhl (61), Director (1991), is the owner of Dick Ruhl Ford
Sales, Inc. Mr. Ruhl is currently the national president of the Ford Dealers
Alumni Association and the current chairman of the Ford Dealers Advertising
Association for Ohio.
David J. Ryan (56), Director (1990), is president of Rimrock Corporation, a
manufacturer of industrial automation equipment. Mr. Ryan is a founding
organizer of Commerce National.
Peter C. Taub (55), Director (1990), is president of Atlas Industrial
Contractors, Inc., an industrial construction company. Mr. Taub is a founding
organizer of Commerce National.
John A. Tonti (53), Director (1990), is president of West Penn Foods, Inc.,
a Wendy's restaurant franchisee. Mr. Tonti is a founding organizer of Commerce
National.
Alan R. Weiler (65), Director (1990), is chief executive officer of
Archer-Meek-Weiler Agency, Inc., an insurance agency. Mr. Weiler is a founding
organizer of Commerce National.
Michael Wren (56), Director (1990), is a professional engineer and owner of
Michael Wren and Associates, an engineering consulting firm. Mr. Wren is a
founding organizer of Commerce National.
35
<PAGE> 40
OFFICERS AND SIGNIFICANT EMPLOYEES
Set forth below is information about the executive officers and significant
employees of CNBC and Commerce National who do not serve as directors on the
Boards of Directors of CNBC or Commerce National.
John A. Romelfanger (38), Vice President, Secretary and Treasurer of CNBC
and Chief Financial Officer and Chief Operating Officer of Commerce National, is
a certified public accountant. Mr. Romelfanger was employed by Crowe, Chizek &
Company, a public accounting firm, from 1982 until he joined Commerce National
in June, 1990.
Pamela S. Miller (36), Principal, Loan Review Officer and Controller, is a
certified public accountant. Ms. Miller's responsibilities include supervision
of Commerce National's credit and loan operations department and significant
involvement in Commerce National's accounting, regulatory reporting, tax and
audit functions. Ms. Miller was employed by Crowe, Chizek & Company, a public
accounting firm, from 1984 until she joined Commerce National in June, 1991.
William G. Huddle (42), Principal and Senior Lending Officer, is an
attorney and supervises Commerce National's real estate lending department. Mr.
Huddle joined Commerce National in September, 1990 and has 12 years of banking
experience. Prior to joining Commercial National, Mr. Huddle supervised the real
estate lending department for another area financial institution. Prior to
working in the banking industry, Mr. Huddle was a practicing attorney for
several law firms in Columbus.
EXECUTIVE COMPENSATION
The following table summarizes all annual and long-term compensation paid
during the fiscal years ended December 31, 1998, 1997, and 1996 to CNBC's Chief
Executive Officer and the other most highly compensated executive officers of
CNBC whose total annual salary and bonus exceeded $100,000 during the fiscal
year ended December 31, 1998 (collectively, the "Named Executive Officers") for
services rendered in all capacities to CNBC and Commerce National.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL COMMON SHARES
NAME AND YEAR ENDED SALARY BONUS COMPENSATION UNDERLYING
PRINCIPAL POSITION DECEMBER 31, ($) ($) ($)(1) OPTIONS
------------------ ------------ -------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Thomas D. McAuliffe, 1998 $140,000 $50,000 $35,000 591
Chairman and President 1997 $125,000 $37,500 $ 9,500 1,720
of CNBC and Chairman, 1996 $120,000 $30,000 $ 9,023 1,920
President and Chief Executive
Officer of Commerce National
John Romelfanger, Vice 1998 $ 92,000 $35,000 $12,742 402
President, Secretary and 1997 $ 83,250 $25,000 $11,080 580
Treasurer of CNBC; 1996 $ 80,000 $20,000 $ 9,514 1,060
Chief Financial Officer and
Chief Operating Officer of
Commerce National
Daniel M. Mahoney, Vice 1998 $ 82,500 $20,000 $ 6,999 361
President of CNBC and 1997 $ 76,500 $20,000 $ 5,808 520
Senior Lending Officer 1996 $ 73,500 $17,500 $ 5,477 980
of Commerce National
</TABLE>
- ---------------
(1) Amounts contributed to the 401(k) savings plan by Commerce National and
amounts accrued under deferred compensation plans.
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<PAGE> 41
EMPLOYMENT AGREEMENT
Thomas D. McAuliffe, CNBC and Commerce National entered into an employment
agreement on March 1, 1998, as amended effective December 31, 1998, pursuant to
which Mr. McAuliffe serves as the President and CEO of CNBC and of Commerce
National. The employment agreement expires on February 28, 2003, subject to
extension by mutual agreement of the parties. The employment agreement provides
for an annual base salary of $140,000 per annum, subject to annual percentage
increases based upon increases in the diluted earnings per common share of CNBC,
and bonuses, which may be awarded in the sole discretion of the Boards of
Directors of CNBC and Commerce National. In addition, Commerce National
contributes $25,000 per year to a trust established by Commerce National as a
supplemental retirement benefit for Mr. McAuliffe's benefit.
Mr. McAuliffe is eligible to participate in all retirement, welfare and
other benefit plans or programs of Commerce National to the same extent as other
Bank executive officers. In addition to any group life coverage, the employment
agreement provides for Commerce National to keep in place and pay premiums on a
life insurance policy on Mr. McAuliffe's life in the face amount of $2,000,000,
with respect to which Mr. McAuliffe may designate the beneficiary. Commerce
National also agrees to reimburse Mr. McAuliffe annually for any premiums paid
by him to maintain in force an individual disability income policy.
The employment agreement terminates automatically upon Mr. McAuliffe's
death and at Commerce National's option, in the event of his disability. The
employment agreement is also terminable by Commerce National "with" or "without
cause" and Mr. McAuliffe may terminate the employment agreement "for good
reason" or "without good reason" or upon a "change in control." If Mr. McAuliffe
elects to terminate his employment following a "change in control," he is
entitled to his unpaid cash compensation through the date of termination, any
previously deferred compensation, accrued but unpaid vacation pay and severance
payments and benefit continuation over a one-hundred twenty (120) month period
based upon an agreed-upon formula. In the event Mr. McAuliffe's employment is
terminated by Commerce National "without cause" or by Mr. McAuliffe for "good
reason," he will be entitled to receive, in addition to accrued but unpaid
compensation and vacation pay, one year's worth of base salary and benefits plus
the amount then held in the trust. If Mr. McAuliffe's employment is terminated
by Commerce National "for cause" or by Mr. McAuliffe "without good reason," he
will only be entitled to receive his accrued (but unpaid) compensation and
vacation pay, along with any compensation previously deferred by him.
The employment agreement provides that during a two (2) year period
following the termination of his employment with Commerce National, unless
terminated by Commerce National in the event of a disability, Mr. McAuliffe may
not compete or become associated with any entity that competes with the business
of CNBC or any of its subsidiaries in any geographic area where CNBC or any of
its subsidiaries operates an office. In addition, during the two (2) year period
referred to above (except by reason of a termination by Commerce National in the
event of a disability), Mr. McAuliffe may not directly or indirectly, encourage
or solicit, or assist any other person or firm in encouraging or soliciting
anyone having a business relationship with Commerce National or any of its
subsidiaries within the two (2) years preceding his termination of employment to
terminate a business relationship with Commerce National or engage in a business
relationship with a competitor.
EMPLOYEE STOCK OPTION PLANS
In April, 1996, the shareholders of Commerce National adopted the 1996
Non-Qualified Stock Option Plan (the "Plan") providing for the grant of
non-qualified stock options to certain directors and key employees of Commerce
National and consolidating prior stock option plans. The exercise price of the
options granted under the Plan will not be less than the fair market value per
share of the common stock on the date of the grant.
The options will be exercisable in whole or in part upon such terms and
conditions as may be determined by the Board of Directors but, in no event, will
options be exercisable later than 20 years after the date of grant. A total of
180,000 shares are approved for grant under the Plan.
During 1998, Commerce National granted 5,950 stock options to employees. Of
this amount, executive officers received the following grants, all subject to a
3-year vesting period: Thomas D. McAuliffe -- 591; John
37
<PAGE> 42
A. Romelfanger -- 402 and Daniel M. Mahoney -- 361. All options granted to
executive officers had an exercise price of $28.00 per share and a 10-year
expiration.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZED VALUE
-------------------------- AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
---- ---------- ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas D. McAuliffe..... 591 9.9% $28.00 12/31/08 $10,591 $26,843
John A. Romelfanger..... 402 6.8% $28.00 12/31/08 $ 7,204 $18,259
Daniel M. Mahoney....... 361 6.1% $28.00 12/31/08 $ 6,469 $16,397
</TABLE>
- ---------------
(1) Grants vest 33 1/3% per year, beginning on December 31, 1999.
The following table summarizes the total outstanding options to executive
officers at December 31, 1998. No options were exercised by executive officers
in 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
---------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ---------------------------- -------------------------
<S> <C> <C>
Thomas D. McAuliffe.................. 31,993/2,378 $650,211/$18,146
John A. Romelfanger.................. 21,470/1,142 $ 436,653/$7,921
Daniel M. Mahoney.................... 21,398/1,035 $ 435,844/$7,240
</TABLE>
COMMERCE NATIONAL BANK DEFERRED COMPENSATION PLANS
Commerce National has a non-qualified deferred compensation plan for
directors. This plan permits the deferral of compensation earned until the
participant's retirement. The participant's election to defer compensation must
be made prior to the date the compensation is earned and all amounts deferred
earn interest.
In addition to the plan for Mr. McAuliffe, described under employment
agreement, Commerce National has non-qualified compensation plans for three of
its senior officers. A plan for Mr. Romelfanger became effective on December 31,
1994. Plans for Mr. Mahoney and Ms. Miller were effective December 31, 1997. All
plans require the officers to remain in the employ of Commerce National for 10
years from the effective date to receive any benefits and are funded by life
insurance policies.
401(K) PLAN
Commerce National has a trusteed 401(k) savings plan covering all employees
who have attained the age of 20 1/2 and work a minimum of 1,000 hours per
calendar year. Salary redirection or "401(k)" contributions are made to the plan
pursuant to a salary redirection agreement between each participant and Commerce
National. Commerce National makes a contribution for each participant equal to
three percent of the participant's compensation. In addition, a fifty (50)
percent match, on contributions up to a maximum of six (6) percent of the
participant's compensation, is made by Commerce National for those participants
who elect to make salary redirection contributions.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of Commerce National has established four
committees. These committees meet with management on a regularly scheduled basis
to review Commerce National's policies, procedures and operating performance on
particular functional areas. The activities of all committees are reviewed by
the Board
38
<PAGE> 43
of Directors. These committees are established in accordance with the Bylaws of
Commerce National, which may be changed from time to time by a majority vote of
the Board of Directors.
The Loan Committee is comprised of three directors, none of whom are
officers of Commerce National, and Mr. McAuliffe. The primary responsibilities
of the Committee are to review and approve loans over particular limits and
review and approve changes to Commerce National's lending policies and
procedures. All board members serve on the loan committee on a rotating basis.
The Committee met 26 times in 1998.
The Funds Management Committee is comprised of not less than four outside
directors, Mr. McAuliffe, Mr. Romelfanger and Ms. Miller. The outside directors
currently serving on this committee include Mr. Gummer, Mr. Weiler, Mr. Ryan and
Mr. Canini. The Committee meets at least quarterly, and its primary
responsibilities include reviewing Commerce National's asset/liability interest
rate sensitivity, reviewing and approving investment policies and practices and
reviewing the operating performance of Commerce National. In 1998, the Committee
met 3 times.
The Compensation Committee is comprised of at least five directors and Mr.
McAuliffe, who is a non-voting member, with its primary responsibility being the
review of personnel policies and practices and evaluation of senior management.
The directors currently serving on the committee include Mr. Corna, Mr. Ryan,
Mr. Tonti, Mr. Ruhl, Mr. Crane and Mr. McDaniel. The Committee met 4 times in
1998.
The Audit Committee is comprised of at least four directors, none of whom
are officers of Commerce National. The Committee's primary responsibilities are
the review of internal and external auditors' reports, the review of internal
loan review reports, evaluation of the internal auditor and external audit firm,
and the review of regulatory examination results. The directors currently
serving on this committee include Mr. Canini, Mr. Hoy, Mr. Kenney and Ms.
DeVillers. The Committee met 4 times in 1998.
Each outside director is paid an attendance fee of $250 per Board of
Directors meeting and $100 per committee meeting.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of CNBC and their associates are customers of, and
have had transactions with, Commerce National in the ordinary course of
business. All outstanding loans and commitments included in such transactions
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and, in the opinion of management, did not involve more than the
normal risk of collectibility or present other unfavorable features.
At December 31, 1998, the aggregate amount of extensions of credit from
Commerce National to directors and executive officers of CNBC and their
respective associates is as follows:
<TABLE>
<CAPTION>
PERCENT OF
BANK CAPITAL
------------
<S> <C> <C>
Amounts outstanding at December 31......................... $6,807,000 68%
Unadvanced commitments and lines of credit................. 2,388,000 24%
---------- --
Total............................................ $9,195,000 92%
========== ==
</TABLE>
Additionally, the directors and executive officers maintained deposit
account relationships with Commerce National totaling $9,350,000 at December 31,
1998. The loan and deposit balances are more substantial than other financial
institutions of similar size due to the fact that many of the directors are
founding organizers of Commerce National and CNBC's board is approximately twice
the size of most similar sized financial institutions. See Note 5 to the
Consolidated Financial Statements attached hereto.
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<PAGE> 44
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The table on the following page sets forth, as of December 31, 1998,
information concerning the number of common shares beneficially owned, including
warrants and options, directly or indirectly, by each director individually, and
by all executive officers and directors of CNBC as a group. No executive
officer, director or any other individual owns more than ten percent (10%) of
the outstanding common shares.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL AMOUNT OF CLASS AS OF
NAME OF BENEFICIAL OWNER OWNERSHIP(A) COMMON STOCK ONLY DECEMBER 31, 1998(A)
------------------------ ------------ ----------------- --------------------
<S> <C> <C> <C>
Thomas D. McAuliffe........................ 88,966 53,612 7.72%
Loreto V. Canini........................... 1,840 1,840 .16%
Mark S. Corna.............................. 7,638 5,020 .68%
Jameson Crane, Jr. (b)..................... 57,640 54,780 5.15%
Judith A. DeVillers........................ 10,124 7,880 0.90%
George A. Gummer........................... 28,842 23,788 2.57%
William L. Hoy............................. 12,132 8,514 1.08%
Douglas W. James (e)....................... 33,660 26,400 2.99%
Donald R. Kenney........................... 71,060 63,800 6.32%
Daniel M. Mahoney.......................... 30,715 9,240 2.70%
Samuel E. McDaniel......................... 7,260 4,400 .65%
Kent K. Rinker............................. 50,038 48,960 4.48%
Richard F. Ruhl............................ 17,275 15,075 1.54%
David J. Ryan.............................. 34,324 30,232 3.06%
Peter C. Taub.............................. 24,334 18,482 2.17%
John A. Tonti (c).......................... 18,712 15,840 1.67%
Alan R. Weiler............................. 40,648 35,624 3.62%
Michael Wren (d)........................... 66,500 54,620 5.89%
All directors and executive officers as a
group (19 persons)....................... 624,377 479,177 49.5%
</TABLE>
- ---------------
(a) Reflects all common shares (including warrants and vested stock options)
"beneficially owned" as of December 31, 1998, by each individual and group,
determined in accordance with the definition of "beneficial ownership" set
forth in the regulations of the Securities and Exchange Commission.
Accordingly, the shares shown may include securities owned by or for, among
others, the spouse and/or minor children of the individual and any other
relative who has the same name as such individual, as well as other shares
as to which the individual has voting or investment power. An individual is
deemed to be the beneficial owner of shares registered in his name or as to
which he exercises sole or shared voting or investment power. Beneficial
ownership may be disclaimed as to certain of the shares.
(b) Includes 31,900 shares owned by Fairwood Investment Company and 18,480
shares and warrants owned by Crane Plastics Company Pension Plan, as to
which Mr. Crane exercises shared voting and investment power.
(c) Includes 3,970 shares owned by West Penn Foods, Inc. and 1,100 shares owned
by Cambridge Leasing Company, as to which Mr. Tonti exercises voting and
investment power.
(d) Includes 660 shares owned by M-E Engineering, Inc., as to which Mr. Wren
exercises voting and investment power.
(e) Includes 1,692 warrants owned by American Business Equipment Pension Plan,
to which Mr. James exercises investment power.
40
<PAGE> 45
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of CNBC consists of 2,000,000 common shares,
no par value, of which 1,116,972 shares were outstanding as of December 31, 1998
and beneficially owned by approximately 400 shareholders. Upon completion of
this offering, CNBC will have up to 1,241,972 common shares outstanding. The
authorized capital stock of CNBC also consists of 200,000 shares of Serial
Preferred Stock, par value $10.00. No shares of Serial Preferred Stock are
issued and outstanding.
VOTING RIGHTS
The holders of common shares are entitled to one vote per share on all
matters submitted to a vote of shareholders, except in the election of
directors, for which the common shares have cumulative voting rights.
DIVIDENDS
CNBC's current policy is to declare dividends semi-annually in June and
December. Although CNBC intends to continue to pay cash dividends on its common
shares in the future based upon its net income and available cash flow, there
can be no assurance that CNBC will have earnings sufficient to pay a dividend on
its common shares or that, even if there are sufficient earnings, dividends will
be permitted under applicable laws or regulatory requirements.
COMMON SHARES FULLY PAID AND NONASSESSABLE
All of the outstanding common shares of CNBC are, and the common shares to
be sold by CNBC pursuant to this offering when issued will be validly issued,
fully paid and nonassessable.
PREEMPTIVE RIGHTS/REPURCHASE AND REDEMPTION
Shareholders of CNBC do not have preemptive rights to purchase or subscribe
to any shares or other securities of CNBC. The Board of Directors may authorize
CNBC at any time to purchase or redeem shares issued by CNBC to the extent of
available surplus.
SPECIAL VOTE FOR CONTROL SHARE ACQUISITIONS
Under the Ohio General Corporate Law, unless a corporation's articles of
incorporation or regulations provide otherwise, any "control share acquisition"
of an "issuing public corporation" can be made only with the prior authorization
of the corporation's shareholders in accordance with the Ohio Control Share
Acquisition Statute (the "Statute"). As an alternative, an Ohio corporation may
include in its articles of incorporation or regulations restrictions on transfer
of its shares in connection with a "control share acquisition," including
procedures for obtaining the consent of shareholders and for the screening by
directors of proposals for such acquisitions. CNBC's Articles provide that the
Statute does not apply to it. Specifically, Article Sixth sets forth a procedure
for obtaining shareholder consent that is consistent with the Statute, subject
to the right of directors to screen out proposals that do not meet certain
standards set forth in Article Sixth of the Articles. The right of the Board of
Directors to screen control share acquisitions is the principal difference
between Article Sixth and the requirements of Ohio law which would otherwise be
applicable to CNBC.
A "control share acquisition" is defined in Article Sixth of the Articles
as any acquisition, whether by tender offer, open market purchase, privately
negotiated transaction or otherwise (with certain limited exceptions), of CNBC
common shares which, when added to all other CNBC common shares owned or
controlled by the acquiror, would entitle the acquiror to exercise or direct the
exercise of voting power in the election of directors within any of the
following ranges of voting power:
(a) one-fifth or more but less than one-third;
(b) one-third or more but less than a majority; and
(c) a majority or more.
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<PAGE> 46
Article Sixth requires that a person proposing to make a control share
acquisition deliver a written notice to CNBC describing, among other things, the
terms of the proposed acquisition and giving reasonable evidence that the
proposed control share acquisition would not be contrary to law and that the
person who gave the notice has the financial capacity to make such an
acquisition. CNBC is required to call and hold, within fifty (50) days after
receipt of the notice, a special meeting of shareholders to vote on the proposed
control share acquisition. However, the Board of Directors has no obligation to
call such a meeting if it determines that (i) the notice was not given in good
faith, (ii) the proposed control share acquisition would not be in the best
interests of CNBC and its shareholders, or (iii) the proposed control share
acquisition could not be consummated for financial or legal reasons.
Notwithstanding the exception in clause (ii) of the preceding sentence, the
Board of Directors is not able to refuse to call such a meeting of shareholders
for the reason stated in clause (ii) if the proposed control share acquisition
is for any and all CNBC common shares at a price higher than 250% of the book
value of CNBC common shares as of the last day of the preceding fiscal year.
Article Sixth provides that a determination by the Board of Directors not
to call such a meeting will not be deemed void or voidable with respect to CNBC
merely because one or more directors who participate in making the determination
might be deemed to be other than "disinterested directors," if in any such case
the material facts of the relationship giving rise to a basis for self-interest
are known to the directors participating in the determination, and such
directors, in good faith reasonably justified by the facts, make such
determination by a majority of the "disinterested directors." For these
purposes, a "disinterested director" means a director whose material contacts
with CNBC are limited principally to activities as a director, a shareholder, a
customer or a depositor of CNBC or any of its subsidiaries or affiliates.
However, a director would not be deemed to be other than a "disinterested
director" merely because he would no longer be a director if the proposed
control share acquisition were approved and consummated.
The notice to shareholders of the special meeting must include or be
accompanied by both the acquiring person's notice and a statement by the CNBC
Board of Directors of its position or recommendation with respect to such
acquisition or a statement that no position is being taken or recommendation
being made.
Approval of a control share acquisition requires the affirmative vote of
both (i) a majority of the voting power represented at the meeting and (ii) a
majority of that portion of such voting power excluding any "interested
shares" -- that is, those shares held by the acquiring person and certain
officers and directors of CNBC.
As drafted, Article Sixth also provides that proxies (which are otherwise
irrevocable if coupled with an interest) given in connection with a control
share acquisition are revocable at any time prior to obtaining the requisite
shareholder vote.
Each CNBC stock certificate will have a legend stating that such shares are
subject to the provisions of Article Sixth. The issuance or transfer of shares
in violation of Article Sixth will be null and void. In the event CNBC is not
permitted to treat an issuance or transfer of shares in violation of Article
Sixth as null and void, Article Sixth provides that such shares will be treated
as treasury shares, not entitling the holder to exercise shareholder rights or
receive dividends.
The Articles establish the concept of a majority vote to adopt amendments
to the Articles but require the affirmative vote of seventy-five percent (75%)
of the voting shares to amend Article Sixth described above (relating to control
share acquisitions) or to adopt provisions having the effect of amending those
provisions of the Regulations dealing with the number, classification and
removal of directors, which are more fully described below.
TRANSFER AGENT AND REGISTRAR
CNBC acts as its own transfer agent and registrar.
CERTAIN PROVISIONS OF CNBC'S ARTICLES OF INCORPORATION AND CODE OF REGULATIONS
CNBC's Articles of Incorporation provide for a classified Board of
Directors. The directors are divided into three classes as nearly equal in
number as possible, and each class is elected for a staggered three-year term of
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<PAGE> 47
office at each annual shareholders meeting. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class elected to fill a vacancy resulting
from an increase in such class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and his
successor shall be elected and shall qualify; subject, however, to prior death,
resignation, or removal from office.
Article Fourth of CNBC's Articles authorizes 200,000 Serial Preferred
Shares ("Serial Shares"), all with a par value of Ten Dollars ($10.00), which
may be issued in one or more series by the Board of Directors. The Board of
Directors is authorized by the Articles to establish, among other things,
dividend rates, cumulative rights, redemption rights or prices, sinking fund
provisions, and conversion rights of the Serial Shares. The holders of Serial
Shares are entitled to be paid dividends when and as declared in preference to
the holders of the common shares. In liquidation or dissolution, the holders of
Serial Shares are entitled to be paid for their shares, plus the amount of any
dividends in arrears, before any amounts are paid to the holders of the common
shares in respect of such Shares. The holders of the Serial Shares are entitled
to one vote per share on all matters presented to the shareholders. Except as
indicated below, the holders of Serial Shares vote with the holders of the
common shares on matters presented to the shareholders. If there is a default in
respect of six quarterly dividends, the holders of the Serial Shares are
entitled to elect two directors to the Board of Directors until such default is
cured. The affirmative vote of the holders of two-thirds of the outstanding
Serial Shares, voting separately as a class, is required to adopt any amendment
to the Articles or Regulations (i) to authorize any class of stock ranking on a
parity with outstanding Serial Shares or to increase the authorized number of
Serial Shares or (ii) to authorize the sale of substantially all of the assets
of CNBC or certain mergers.
In the event of a tender offer or other attempt to gain control of CNBC
that the Board of Directors does not approve, it would be possible for the Board
of Directors to authorize the issuance of a series of Serial Shares with rights
and preferences that could impede the completion of such a transaction. The
flexibility of the Board of Directors to take such action will be increased by
virtue of the denial of preemptive rights. However, CNBC does not at present
have any plans, arrangements, commitments or understandings to issue any Serial
Shares. Any Serial Shares issued in the future will be on terms which the Board
of Directors deems to be in the best interests of CNBC and its shareholders.
Under CNBC's Regulations, a special meeting of shareholders may be called
by the President, a Vice President or a majority of the Board of Directors, and
by shareholders holding a requisite percentage of the shares entitled to vote.
With respect to special meetings called by shareholders, the Regulations provide
that the requisite percentage for calling such meetings is fifty percent (50%).
This provision is consistent with the maximum permissible requirement under Ohio
law.
The Regulations establish a requirement that advance notification of
nominations of directors by shareholders be given to the Secretary of CNBC, as a
general rule, not less than sixty (60) nor more than ninety (90) days prior to
the date of any shareholders' meeting (as initially called, in the case of
adjourned meetings) held for the purpose of electing directors. If less than
seventy-five (75) days notice or prior public disclosure of a meeting date is
given or made to the shareholders, in order to be timely, the shareholders'
notice must be received by the close of business on the fifteenth day following
the earlier of the day the meeting notice was mailed or public disclosure of the
meeting was made. The notice of nomination must set forth certain information
regarding each nominee who is not an incumbent director and must be accompanied
by the written consent of the proposed nominee to serve as a director if
elected. Nominations which the chairman of the meeting determines not to have
been made in accordance with the Regulations are to be disregarded.
A similar provision applies to business that may be brought before a
meeting of shareholders by a shareholder. CNBC Regulations provide that a
shareholder must give the Secretary written notice that a matter is to be
brought before such a meeting, as a general rule, not less than sixty (60) nor
more than ninety (90) days prior to the date of the meeting (as initially
called, in the case of adjourned meetings). If less than seventy-five (75) days
notice or prior public disclosure of a meeting date is given or made to the
shareholders, in order to be timely, the shareholders' notice must be received
by the close of business on the fifteenth day following the earlier of the day
the meeting notice was mailed or public disclosure of the meeting was made. The
notice must
43
<PAGE> 48
contain, among other things, a brief description of the business the shareholder
desires to bring before the meeting, the reasons thereof and any material
interest of such shareholder in such business.
The purpose of these nomination and shareholder proposal procedures is to
avoid the possibility of nominations or proposals being made in a way that would
preclude the Board from investigating and the shareholders from adequately
assessing the competence, experience, integrity and other relevant factors
concerning the qualifications of a proposed nominee or any relevant factors
concerning shareholder proposals. The Board of Directors believes that matters
should be brought before a meeting in an orderly fashion and in sufficient time
before a meeting so that shareholders may be provided adequate information in
order to vote on a fully-informed basis.
The provisions described above could deter a shareholder from gaining
control of CNBC by means of making nominations for directors or proposing
shareholder actions from the floor of a meeting or by means of a proxy contest
instituted so close to the date of a shareholders' meeting that adequate
information might not be available to shareholders.
A possible adverse effect of the nomination and shareholder proposal
provisions may be that persons otherwise qualified to serve as directors and who
are proposed for nomination and election by holders of a majority of the
outstanding voting shares may not be nominated or elected due to inadvertence or
otherwise. Also, this provision may make it easier for incumbent directors to
solicit proxies to resist a dissident slate of directors and thus retain their
status as directors, even when the dissident nominations might be in the best
interests of CNBC and its shareholders. In this sense, the provisions can be
viewed as advantageous to incumbent directors and executive officers and may
discourage takeover attempts.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 1701.13 of the Ohio Revised Code provides for the indemnification
of officers and directors against liability and certain expenses that may be
incurred by them in the event of an action against them as a result of their
service for or on behalf of CNBC. The Code of Regulations of CNBC contains
specific provisions in regard to indemnification of officers and directors of
CNBC and its subsidiaries to implement the general provisions of such section.
Furthermore, to enable CNBC to continue to attract and retain qualified
directors and officers, CNBC has entered into indemnification agreements with
each director and officer of CNBC that specify the types of matters for which
indemnification by CNBC is available and the extent of indemnification afforded
and provide for advancement of defense expenses under certain conditions.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the common shares could drop as a result of sales of a
large number of common shares in the market after the offering, or the
perception that such sales could occur. These factors could also make it more
difficult for CNBC to raise funds through future offerings. As a result of the
offering, there will be an additional 125,000 Company common shares outstanding.
All of these shares will be freely transferable without restriction of future
registration, except for any common shares purchased by "affiliates" of CNBC, as
defined in Rule 144 under the Securities Act. The remaining 1,116,972
outstanding common shares of CNBC, which have been issued in private offerings
or are issuable upon the exercise of warrants, are "restricted securities" as
defined in Rule 144 and may be resold without restriction to the extent
permitted by Rule 144 or an exemption under the Securities Act. It should be
noted that the holding period restrictions on the majority of the 1,116,972
shares have lapsed. Assuming the offering is fully subscribed for, CNBC will
have 522,348 authorized but unissued shares which may be issued without further
approval of its shareholders.
LEGAL PROCEEDINGS
Neither CNBC nor Commerce National is a party to any material pending legal
proceedings.
44
<PAGE> 49
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997 and
for the years then ended included in this prospectus and in the Registration
Statement have been audited by Crowe, Chizek and Company LLP, independent public
accountants, as set forth in their report thereon dated February 5, 1999, which
appears elsewhere herein and in the Registration Statement. All such financial
statements have been included herein in reliance upon such reports given upon
the authority of such firm as experts in auditing and accounting.
The validity of the common shares offered hereby has been passed upon for
CNBC by the law firm of Squire, Sanders & Dempsey L.L.P., Cleveland, Ohio.
45
<PAGE> 50
FINANCIAL STATEMENTS
Consolidated Financial Statements for the years ended December 31, 1998 and
1997.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-1
Consolidated Financial Statements:
Balance Sheets............................................ F-2
Income Statements......................................... F-3
Comprehensive Income Statements........................... F-4
Statements of Changes in Shareholders' Equity............. F-5
Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the Shareholders
of CNBC Bancorp:
We have audited the accompanying consolidated balance sheets of CNBC
Bancorp as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of CNBC Bancorp's management. Our responsibility is to express an
opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 CNBC Bancorp
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
CROWE, CHIZEK AND COMPANY, LLP
Columbus, Ohio
February 5, 1999
F-1
<PAGE> 52
CNBC BANCORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and Non Interest-Bearing Balances...................... $ 5,256,468 $ 5,084,869
Interest Bearing Balances................................... 2,589,088 794,592
Federal Funds Sold.......................................... 4,850,000 4,000,000
Money Market Funds.......................................... 4,801,173 5,180,572
------------ ------------
Total Cash and Cash Equivalents................... 17,496,729 15,060,033
Securities Available for Sale............................... 5,218,341 4,050,988
Loans, Net.................................................. 148,880,855 117,078,439
Premises and Equipment...................................... 1,943,744 1,863,380
Accrued Interest Receivable................................. 825,435 641,591
Deferred Federal Income Taxes............................... 589,000 434,000
Other Assets................................................ 159,079 196,350
------------ ------------
Total Assets................................................ $175,113,183 $139,324,781
============ ============
LIABILITIES
Deposits:
Non-Interest Bearing...................................... $ 21,013,393 $ 16,891,426
Interest Bearing.......................................... 130,466,924 102,213,987
------------ ------------
Total Deposits.................................... 151,480,317 119,105,413
Borrowings.................................................. 10,684,892 8,860,482
Other Liabilities........................................... 976,472 877,222
------------ ------------
Total Liabilities........................................... 163,141,681 128,843,117
SHAREHOLDERS' EQUITY
Common Stock No Par Value;
Authorized Shares -- 2,000,000 Issued and
Outstanding -- 1,116,972 in 1998 and 555,890 in 1997...... 8,379,375 8,349,051
Retained Earnings........................................... 3,579,127 2,133,913
Accumulated Other Comprehensive Income...................... 13,000 (1,300)
------------ ------------
Total Shareholders' Equity.................................. 11,971,502 10,481,664
------------ ------------
Total Liabilities and Shareholders' Equity.................. $175,113,183 $139,324,781
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE> 53
CNBC BANCORP
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
INTEREST INCOME
Loans, including Fees..................................... $11,710,276 $9,160,044
Taxable Securities........................................ 301,732 212,621
Money Market Funds........................................ 321,505 219,432
Federal Funds Sold........................................ 202,094 75,490
Deposits with Banks....................................... 191,122 62,761
----------- ----------
Total Interest Income....................................... 12,726,729 9,730,348
----------- ----------
INTEREST EXPENSE
Deposits.................................................. 5,604,950 4,137,289
Borrowings................................................ 615,537 487,178
----------- ----------
Total Interest Expense...................................... 6,220,487 4,624,467
----------- ----------
Net Interest Income....................................... 6,506,242 5,105,881
Provision for Loan Losses................................. 479,732 385,600
----------- ----------
Net Interest Income After Provision for Loan Losses......... 6,026,510 4,720,281
NON-INTEREST INCOME
Service Charges on Deposits............................... 131,489 118,580
Other Income.............................................. 116,631 69,879
----------- ----------
Total Non-Interest Income................................... 248,120 188,459
----------- ----------
NON-INTEREST EXPENSES
Salaries and Benefits..................................... 2,077,043 1,529,582
Occupancy and Equipment, Net.............................. 83,313 166,780
Data Processing........................................... 261,261 228,830
Customer Courier.......................................... 175,500 146,750
Professional Services..................................... 154,576 133,699
State Franchise Tax....................................... 130,915 117,723
Other Expenses............................................ 598,006 445,507
----------- ----------
Total Non-Interest Expenses................................. 3,480,614 2,768,871
----------- ----------
Income Before Income Taxes.................................. 2,794,016 2,139,869
Income Tax Expense.......................................... 969,530 745,200
----------- ----------
Net Income................................................ $ 1,824,486 $1,394,669
=========== ==========
EARNINGS PER COMMON SHARE
Basic..................................................... $ 1.64 $ 1.31
=========== ==========
Diluted................................................... $ 1.48 $ 1.21
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 54
CNBC BANCORP
CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net Income.................................................. $1,824,486 $1,394,669
Other Comprehensive Income:
Unrealized Gain on Securities Available for Sale............ 21,591 14,808
Tax Effect.................................................. 7,291 5,008
---------- ----------
Other Comprehensive Income.................................. 14,300 9,800
---------- ----------
Comprehensive Income........................................ $1,838,786 $1,404,469
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 55
CNBC BANCORP
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
NUMBER COMMON RETAINED COMPREHENSIVE
OF SHARES STOCK EARNINGS INCOME TOTAL
--------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1997....... 526,827 $7,297,557 $1,010,790 $(11,100) $ 8,297,247
Offering Proceeds from Sale of
Shares.......................... 25,000 1,000,000 1,000,000
Offering Costs.................... (8,193) (8,193)
Proceeds from Exercise of
Warrants........................ 2,633 29,911 29,911
Proceeds and Tax Benefit from
Exercise of Stock Options....... 1,430 29,776 29,776
Net Income........................ 1,394,669 1,394,669
Cash Dividends Declared ($.25 per
Share).......................... (271,546) (271,546)
Other Comprehensive Income........ 9,800 9,800
--------- ---------- ---------- -------- -----------
BALANCES AT DECEMBER 31, 1997..... 555,890 8,349,051 2,133,913 (1,300) 10,481,664
Two-for-One Stock Split........... 555,890
Proceeds from Exercise of
Warrants........................ 5,092 28,922 28,922
Proceeds and Tax Benefit from
Exercise of Stock Options....... 100 1,402 1,402
Net Income........................ 1,824,486 1,824,486
Cash Dividends Declared ($.34 per
Share).......................... (379,272) (379,272)
Other Comprehensive Income........ 14,300 14,300
--------- ---------- ---------- -------- -----------
BALANCES AT DECEMBER 31, 1998..... 1,116,972 $8,379,375 $3,579,127 $ 13,000 $11,971,502
========= ========== ========== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 56
CNBC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................................. $ 1,824,486 $ 1,394,669
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Provision for Loan Losses.............................. 479,732 385,600
Depreciation........................................... 150,152 121,237
Loss on Disposal of Equipment.......................... 20,798
Deferred Income Taxes.................................. (163,000) (113,000)
Net Amortization/Accretion on Securities............... 8,974 (3,027)
Federal Home Loan Bank Stock Dividend.................. (100,900) (69,300)
Changes in:
Interest Receivable.................................. (183,844) (136,325)
Other Assets......................................... 70,030 (58,973)
Other Liabilities.................................... 16,281 273,712
------------ ------------
Net Cash Provided by Operating Activities................. 2,122,709 1,794,593
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Securities..................................... (3,053,836) (1,333,608)
Maturities of Securities.................................... 2,000,000 500,000
Net Increase in Loans....................................... (32,282,148) (32,377,186)
Purchase of Premises and Equipment.......................... (251,314) (1,703,415)
------------ ------------
Net Cash Flows Used in Investing Activities............... (33,587,298) (34,914,209)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits.................................... 32,374,904 28,728,872
Net Proceeds from Issuance of Common Stock.................. 30,324 1,051,494
Maturities of Federal Home Loan Bank Advances............... (1,250,000) (1,250,000)
Advances from Federal Home Loan Bank........................ 3,750,000 3,550,000
Principal Payments on Federal Home Loan Bank Advances....... (675,590) (323,567)
Net Proceeds from Loan Payable.............................. -- 2,000,000
Dividends Paid.............................................. (328,353) (316,966)
------------ ------------
Net Cash Flows Provided by Financing Activities........... 33,901,285 33,439,833
------------ ------------
Net Change in Cash and Cash Equivalents................... 2,436,696 320,217
Cash and Cash Equivalents at Beginning of Year.............. 15,060,033 14,739,816
------------ ------------
Cash and Cash Equivalents at End of Year.................... $ 17,496,729 $ 15,060,033
============ ============
Cash Paid During the Year for
Interest.................................................. $ 6,168,368 $ 4,570,182
Income Taxes.............................................. 1,125,000 857,000
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 57
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in the preparation of the financial statements.
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of CNBC Bancorp ("Bancorp") and its wholly owned subsidiary, Commerce
National Bank ("Bank"). All significant intercompany balances and transactions
have been eliminated in consolidation.
NATURE OF OPERATIONS: Revenues and assets are derived from the banking
industry, serving primarily small business customers in the central Ohio region.
Banking deposit products include checking and savings accounts and certificates
of deposit. Business loans are secured by real estate, accounts receivable,
inventory, equipment and other types of collateral and are expected to be repaid
from cash flows from operations of businesses. Personal loans are secured by
real estate, stocks and other collateral. A small portion of loans are
unsecured. All of Bancorp's banking operations are considered by management to
be aggregated in one reportable operating segment.
USE OF ESTIMATES: To prepare financial statements in conformity with
generally accepted accounting principles, management makes certain estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided. Future results could differ from these estimates. The allowance for
loan losses, fair values of financial instruments and status of contingencies
are more susceptible to change.
SECURITIES: Securities can be classified into held to maturity, available
for sale, and trading categories. Held to maturity securities are those which
management has the positive intent and ability to hold to maturity, and are
reported at amortized cost. Available for sale securities are those which may be
sold prior to maturity for liquidity, asset-liability management, or other
reasons. Available for sale securities are reported at fair value, with
unrealized gains or losses reported in other comprehensive income. Trading
securities are bought principally for sale in the near term and are reported at
fair value with unrealized gains or losses included in earnings. Realized gains
or losses are determined based on the amortized cost of the specific security
sold. Interest income includes amortization of purchase premium or discount.
Securities are written down to fair value when a decline in fair value is not
temporary.
LOANS: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs and the allowance for loan losses. Interest income
on loans is recognized on the interest method and includes amortization of net
deferred loan fees and costs over the loan term. The accrual of interest on
loans will be suspended when, a loan is 90 days or more past due unless the loan
is well collateralized or in the process of collection. When a loan is placed on
nonaccrual status, accrued and unpaid interest at risk is charged against
income. Payments received on nonaccrual loans will be applied against principal
until recovery of the remaining balance is reasonably assured.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable credit losses increased by recording a provision for loan
losses, which is charged to current expense, and receiving recoveries on loans
previously charged-off. The allowance for loan losses is decreased by loan
charge-offs. Management's periodic evaluation of the adequacy of the allowance
is based on known and inherent risks in the nature and volume of the loan
portfolio, assessment of individual borrower's ability to repay their loans
including the value of any collateral, current economic conditions, and past
loan loss experience. Many of these factors are subjective and may change over
time. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off. A loan is classified as impaired when full payment under
the loan terms is not expected. Impairment is evaluated in total for smaller
balance loans or loans of a similar nature such as residential mortgage and
credit card loans, and on an individual
F-7
<PAGE> 58
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
basis for other loans. Loans considered to be impaired are reduced to the
present value of expected future cash flows, or to the fair value of collateral
securing the loan if repayment is expected solely from the collateral, by
allocating a portion of the allowance for loan losses to such loans. Loans are
evaluated for impaired status when payments are past due 90 days or more or when
management's grading system indicates a doubtful classification. Interest
received on impaired loans that are not on nonaccrual status is recorded as
interest income.
CONCENTRATION OF CREDIT RISK: Business and real estate investment loans
comprised approximately 78 percent and 75 percent of total loans at December 31,
1998 and 1997, respectively.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful life of the asset. Maintenance and repairs are charged to
expense as incurred, and major improvements are capitalized. Assets are reviewed
for impairment when events indicate the carrying amount may not be recoverable.
EMPLOYEE BENEFITS: A trusteed 401(k) savings plan covers all employees who
have attained the age of 20 1/2 and work a minimum of 1,000 hours per calendar
year. An employer contribution for each participant equal to three percent of
the participant's compensation is made annually. The plan also allows employee
contributions, with contributions up to six percent of the participant's
compensation matched 50 percent by the employer. Expense related to the plan was
$84,200 and $60,400 in 1998 and 1997. No post-retirement benefits other than the
401(k) plan are provided to employees.
STOCK COMPENSATION: Expense for employee compensation under the stock
option plan is recorded only if options are granted below the market value of
the stock on the grant date. Pro forma disclosures of net income and earnings
per share are shown using the fair value method of SFAS No. 123 to measure
expense for options granted after 1994, using an option pricing model to
estimate fair value.
INCOME TAXES: Income tax expense is the sum of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
EARNINGS PER SHARE: Bancorp adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 on December 31, 1997 which requires dual presentation
of basic and diluted earnings per share ("EPS"). Basic EPS is net income divided
by the weighted-average number of common shares outstanding. Diluted EPS is the
weighted-average number of common shares outstanding during the year and the
assumed exercise of dilutive stock options and warrants less the number of
treasury shares assumed to be purchased from the proceeds using the average
market price of Bancorp's common stock. The calculation for weighted average
shares is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Weighted average shares for basic EPS....................... 1,113,952 1,067,216
Add dilutive effect of:
Exercise of warrants...................................... 46,318 43,196
Exercise of stock options................................. 68,458 43,214
--------- ---------
Weighted averages shares for diluted EPS.................... 1,228,728 1,153,626
</TABLE>
The weighted-average shares outstanding and earnings per share and
dividends per share information has been adjusted to reflect the 2-for-1 stock
split declared by Bancorp in January, 1998.
STATEMENTS OF CASH FLOWS: Cash flows are reported net for customer loan and
deposit transactions. Cash and cash equivalents are defined as those amounts
included in the balance sheet captions, "Cash and Non Interest-Bearing
Balances," "Interest Bearing Balances," "Federal Funds Sold," and "Money Market
Funds."
F-8
<PAGE> 59
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
DIVIDEND RESTRICTION: Banking regulations require maintaining certain
capital levels and may limit the dividends paid by Bank to Bancorp or by Bancorp
to shareholders.
RECLASSIFICATIONS: Certain items in the financial statements have been
reclassified to conform with the current presentation.
NOTE 2 -- MONEY MARKET FUNDS
Money market funds consist of investments in money market mutual funds that
buy and sell at a constant $1 per share value; therefore, cost and fair value
are the same. Balances in the funds are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Liquid Cash Trust (LCT)..................................... $2,138,164 $3,000,343
Automated Government Money Trust (AGMT)..................... 2,263,223 1,491,191
Money Market Flex Fund...................................... 399,786 689,038
---------- ----------
Total............................................. $4,801,173 $5,180,572
========== ==========
</TABLE>
LCT has approximately $514 million in assets which consist of federal funds
sold to banks and repurchase agreements secured by U.S. Treasury securities
which are held in safekeeping by a third-party custodian.
AGMT has approximately $2.4 billion in assets which consist of short term
U.S. Treasury obligations and repurchase agreements secured by U.S. Treasury
securities which are held in safekeeping by a third-party custodian.
The Flex Fund has approximately $154 million in assets which consist of
commercial paper, corporate bonds, and U.S. Treasury securities.
F-9
<PAGE> 60
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale were as
follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GROSS GAINS GROSS LOSSES VALUE
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury Securities.................. $3,791,342 $21,848 $(2,249) $3,810,941
Federal Reserve Bank Stock................ 217,700 217,700
Federal Home Loan Bank Stock.............. 1,189,700 1,189,700
---------- ------- ------- ----------
Total..................................... $5,198,742 $21,848 $(2,249) $5,218,341
========== ======= ======= ==========
December 31, 1997
U.S. Treasury Securities.................. $2,746,480 $ 4,200 $(6,192) $2,744,488
Federal Reserve Bank Stock................ 217,700 217,700
Federal Home Loan Bank Stock.............. 1,088,800 1,088,800
---------- ------- ------- ----------
Total..................................... $4,052,980 $ 4,200 $(6,192) $4,050,988
========== ======= ======= ==========
</TABLE>
The amortized cost and fair value of debt securities by contractual
maturity, are shown below.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due Within One Year......................................... $ 749,698 $ 751,562
Due in One to Five Years.................................... 3,041,644 3,059,379
---------- ----------
Total Debt Securities.................................. $3,791,342 $3,810,941
========== ==========
</TABLE>
No sales of securities occurred in 1998 or 1997.
At December 31, 1998 and 1997, there were no holdings of securities of any
one issuer, other than the U.S. Government or U.S. Government agencies, in an
amount greater than 10 percent of shareholders' equity.
At December 31, 1998 and 1997, $1,986,000 and $962,000, respectively, in
amortized cost of U.S. Treasury securities were pledged to secure public funds
or other obligations.
NOTE 4 -- LOANS
Loans were comprised of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Residential Real Estate Loans........................... $ 22,702,068 $ 19,931,398
Real Estate Investment Loans............................ 63,607,025 46,697,339
Business Loans.......................................... 54,238,808 42,456,456
Personal Loans.......................................... 10,616,288 9,771,403
------------ ------------
Subtotal...................................... 151,164,189 118,856,596
Allowance for Loan Losses............................... (2,055,000) (1,600,000)
Net Deferred Fees and Costs............................. (228,334) (178,157)
------------ ------------
Net Loans............................................... $148,880,855 $117,078,439
============ ============
</TABLE>
F-10
<PAGE> 61
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- LOANS -- CONTINUED
Activity in the allowance for loan losses for the years ended December 31,
was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Beginning Balance........................................... $1,600,000 $1,264,400
Loan Loss Provision......................................... 479,732 385,600
Loans Charged Off........................................... (24,732) (50,000)
---------- ----------
Ending Balance.............................................. $2,055,000 $1,600,000
========== ==========
</TABLE>
Information regarding impaired loans was as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Average Investment in Impaired Loans........................ $256,780 $150,806
Interest Income Recognized During Impairment................ 14,830 9,468
Cash Basis Interest Income Recognized on Impaired Loans..... 14,991 9,412
</TABLE>
Information regarding impaired loans at December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loans Past Due Over 90 Days and Accruing Interest........... $ -- $ --
Impaired Loans with No Allowance for Losses Allocated....... 80,025 100,000
Impaired Loans with Allowance for Loan Losses Allocated..... 386,741 101,894
Amount of Allowance for Loan Losses Allocated to Impaired
Loan Balance.............................................. 75,000 50,000
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS
In the ordinary course of business, certain of the executive officers and
directors of Bancorp and the Bank have loan and deposit relationships with the
Bank. Total deposit balances were $9,350,000 and $8,203,000 at December 31, 1998
and 1997. Activity for related party loans was as follows:
<TABLE>
<S> <C>
Beginning of Year........................................... $5,511,000
New Loans................................................... 2,233,000
Repayments.................................................. (937,000)
----------
End of Year................................................. $6,807,000
==========
</TABLE>
NOTE 6 -- PREMISES AND EQUIPMENT
Premises and equipment was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and Building........................................... $1,663,819 $1,599,639
Equipment, Software and Furniture........................... 800,741 660,081
---------- ----------
2,464,560 2,259,720
Less Accumulated Depreciation............................... (520,816) (396,340)
---------- ----------
Premises and Equipment, Net................................. $1,943,744 $1,863,380
========== ==========
</TABLE>
F-11
<PAGE> 62
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- PREMISES AND EQUIPMENT -- CONTINUED
On June 1, 1997, the Bank purchased the building in which its office is
located. The Bank occupies approximately 40 percent of the building, with the
remaining space leased to other businesses. Rental income received during the
years ended December 31, 1998 and 1997 totaled $236,614 and $113,386. Prior to
June 1, 1997, the Bank leased its office space. Lease expense for 1997 was
$54,791.
NOTE 7 -- DEPOSITS
Total interest bearing deposits were classified as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Interest Bearing Demand................................. $ 14,232,748 $ 9,169,345
Savings................................................. 58,690,625 39,483,320
Time, Balances Under $100,000........................... 30,571,254 27,646,361
Time, Balances $100,000 and Over........................ 26,972,297 25,914,961
------------ ------------
Total Interest Bearing Deposits......................... $130,466,924 $102,213,987
============ ============
</TABLE>
Total deposit accounts with balances of $100,000 and over, including non
interest-bearing demand accounts, totaled $89,660,000 and $66,559,000 at
December 31, 1998 and 1997. The Bank accepts time deposits from customers
outside its primary market area, which are primarily solicited through a
national rate-listing network. The total balances of these time deposits were
$30,401,000 and $27,952,000 at December 31, 1998 and 1997. At December 31, 1998
and 1997, the average weighted remaining maturity of these deposits was 9.6
months and 14.5 months, and the weighted average interest rate paid was 5.98
percent and 6.17 percent.
Stated maturities of time deposits were as follows:
<TABLE>
<S> <C>
1999........................................................ $42,627,000
2000........................................................ 13,553,000
2001........................................................ 1,251,000
2002........................................................ 95,000
2003........................................................ 18,000
-----------
Total....................................................... $57,544,000
===========
</TABLE>
NOTE 8 -- BORROWINGS
Borrowings consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
FHLB Term Advances......................................... $ 4,500,000 $2,282,609
FHLB Mortgage Matched Advances............................. 4,184,892 4,577,873
Loan Payable............................................... 2,000,000 2,000,000
----------- ----------
Total...................................................... $10,684,892 $8,860,482
=========== ==========
</TABLE>
Term advances and mortgage matched advances from the Federal Home Loan Bank
("FHLB") are used as a longer term funding source. Mortgage matched advances
with original maturities ranging from 10 to 20 years are utilized to fund
specific fixed rate loans with certain prepayment of principal permitted without
penalty. Interest rates on mortgage-matched advances ranged from 5.55 percent to
7.70 percent at December 31, 1998 and amortize through September, 2017. Term
advances cannot be prepaid without penalty. Interest rates on term
F-12
<PAGE> 63
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- BORROWINGS -- CONTINUED
advances ranged from 5.38 percent to 6.20 percent at December 31, 1998 and
mature between June, 1999 and January, 2008. At December 31, 1998, required
principal payments were as follows:
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED AVERAGE
PAYMENTS INTEREST RATE
---------- ----------------
<S> <C> <C>
1999.................................................... $ 681,574 6.21%
2000.................................................... 1,204,208 6.22%
2001.................................................... 1,503,107 5.70%
2002.................................................... 1,416,006 5.65%
2003.................................................... 1,395,954 5.67%
2004 & thereafter....................................... 2,484,043 6.36%
----------
Total................................................... $8,684,892
==========
</TABLE>
On May 1, 1997, Bancorp borrowed $2,000,000 from another financial
institution. The proceeds were utilized to purchase subordinated notes of
Commerce National Bank. The interest rate on the loan adjusts every 90 days for
the first two years at 2.50 percent over the 90-day U.S. Treasury bill rate. The
interest rate on the loan was 6.45 percent and 7.60 percent at December 31, 1998
and 1997. Only interest payments are required for the first two years. On May 1,
1999, the rate will adjust to a fixed interest rate of 2.50 percent over the
5-year U.S. Treasury note rate and Bancorp will be required to make equal
monthly principal and interest payments calculated on a 96-month amortization.
The loan is unsecured; however, Bancorp has agreed not to pledge its ownership
interest in Commerce National Bank stock during the term of the loan.
Additionally, a $4 million cash management advance revolving line of credit
was approved with the FHLB. At December 31, 1998 and 1997, no advances were
outstanding on the line. Available collateral for all FHLB advances totaled
$39,120,000 and $33,953,000 at December 31, 1998 and 1997 and consists of a
blanket pledge of all first mortgage loans secured by 1-4 family residential
properties and all FHLB stock.
NOTE 9 -- INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Current..................................................... $1,132,530 $858,200
Deferred.................................................... (163,000) (113,000)
---------- --------
Total Income Tax Expense.................................... $ 969,530 $745,200
========== ========
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 34 percent to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Tax Expense at Statutory Rate of 34%........................ $949,965 $727,555
Increase in Taxes Resulting from Nondeductible Expenses... 19,565 17,645
-------- --------
Income Tax Expense................................ $969,530 $745,200
======== ========
</TABLE>
F-13
<PAGE> 64
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- INCOME TAXES -- CONTINUED
Deferred tax assets and liabilities at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Assets
Allowance for Loan Losses................................. $688,000 $535,000
Deferred Compensation Expense............................. 91,000 65,000
Deferred Loan Fees........................................ 17,000 22,000
Other..................................................... -- 1,000
-------- --------
Total............................................. 796,000 623,000
Deferred Tax Liabilities
Cash Basis Reporting...................................... (48,000) (73,000)
Nontaxable Stock Dividend................................. (98,000) (71,000)
Accumulated Depreciation.................................. (32,000) (29,000)
Other..................................................... (29,000) (16,000)
-------- --------
Total............................................. (207,000) (189,000)
-------- --------
Total, Net........................................ $589,000 $434,000
======== ========
</TABLE>
NOTE 10 -- COMMON STOCK WARRANTS
In connection with the initial stock offering in 1991, warrants were issued
to all shareholders. Each warrant is freely transferable and entitles the holder
to purchase a share of common stock at $5.68 per share. The warrants will expire
on October 11, 2000, and are subject to adjustment for stock splits, stock
dividends, and similar transactions. At December 31, 1998 and 1997, 59,520 and
64,612 warrants were issued and outstanding. In 1998 and 1997, 5,092 and 5,266
warrants were exercised. In connection with the formation of CNBC Bancorp, all
fractional warrants were rounded up to the nearest whole warrant resulting in
the issuance of an additional 14.8 warrants. All information has been restated
to reflect the two-for-one stock split.
NOTE 11 -- STOCK OPTION PLANS
Stock option plans are used to reward employees and directors and provide
them with an additional equity interest in Bancorp. Options granted prior to
1996 have a 20 year expiration and were 100 percent vested on the grant date.
Options granted in 1996 and later were issued with a 10 year expiration with
vesting occurring over either a 3- or 5-year period, depending on the employee's
years of service. At December 31, 1998 and 1997, 13,330 and 19,280 shares were
authorized for future grants. Information about option grants follows.
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding, Beginning of 1997............................ 149,720 8.00
Granted................................................... 10,120 18.59
Exercised................................................. (2,860) 7.75
-------
Outstanding, End of 1997.................................. 156,980 8.69
Granted................................................... 5,950 27.44
Exercised................................................. (100) 6.82
-------
Outstanding, End of 1998.................................. 162,830 9.37
=======
</TABLE>
Options exercisable totaled 146,006 and 140,930 at December 31, 1998 and
1997.
F-14
<PAGE> 65
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- STOCK OPTION PLANS -- CONTINUED
SFAS No. 123, which became effective for 1996, requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents net income and earnings per share had the Standard's fair
value method been used to measure compensation cost for stock option plans. No
compensation cost was recognized for stock option plans for 1998 or 1997. All
information has been adjusted to reflect the 2-for-1 stock split.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net Income as Reported...................................... $1,824,486 $1,394,669
Pro Forma Net Income........................................ $1,804,926 $1,385,377
Basic Earnings per Share as Reported........................ $ 1.64 $ 1.31
Pro Forma Basic Earnings Per Share.......................... $ 1.62 $ 1.30
Diluted Earnings per Share as Reported...................... $ 1.48 $ 1.21
Pro Forma Diluted Earnings per Share........................ $ 1.47 $ 1.20
</TABLE>
All options are granted at the market price of the stock on the date of
grant. For options granted during 1998 and 1997, the weighted-average fair
values at grant date were calculated to be $7.21 and $5.85.
The fair value of options granted during 1998 and 1997 is estimated using
the following weighted-average information: risk-free interest rate of 4.65% and
5.75%, expected life of 10 years, no expected volatility of stock price, and an
expected dividend yield of 1.2% and 1.0%.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISABLE CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
$ 5.68 - $ 7.27 80,530 80,530 13.4 Years $ 6.74
$ 8.18 - $10.75 57,770 57,770 15.6 Years $ 8.68
$15.38 - $28.00 24,530 7,706 8.8 Years $19.63
</TABLE>
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material effect on financial condition or results of operations.
At December 31, 1998 and 1997, reserves of $1,061,000 and $915,000 were
required as deposits with the Federal Reserve or as cash on hand. These reserves
do not earn interest.
Some financial instruments are used in the normal course of business to
meet the financing needs of customers and to reduce exposure to interest rate
changes. These financial instruments include commitments to extend credit and
standby letters of credit. These involve, to varying degrees, credit and
interest-rate risk in excess of the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented
by the contractual amount for commitments to extend credit, standby letters of
credit, and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Some of the commitments are expected to expire
without being used;
F-15
<PAGE> 66
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
therefore, the total commitments does not necessarily represent future cash
requirements. Standby letters of credit and financial guarantees written are
conditional commitments to guarantee a customer's performance to a third party.
A summary of the notional or contractual amounts of financial instruments
with off-balance-sheet risk is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Approved, Unadvanced Lines of Credit...................... $30,853,000 $22,415,000
Unadvanced Draw Notes..................................... 6,223,000 5,403,000
New Loan Commitments:
Secured by Real Estate.................................. 11,593,000 8,026,000
Other................................................... 3,155,000 3,136,000
Letters of Credit......................................... 1,327,000 532,000
Available Lines for Credit Cards.......................... 1,182,000 941,000
</TABLE>
NOTE 13 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value of financial instruments
and the related carrying values at year-end. Items that are not financial
instruments are not included. These would include, among others, such items as
property and equipment, and intangible value of the Bank's customer base and
profit potential.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets
Cash and Equivalents............................ $ 17,497 $ 17,497 $ 15,060 $ 15,060
Securities Available for Sale................... 5,218 5,218 4,051 4,051
Loans, Net of Allowance for Loan Losses......... 148,881 150,600 117,078 117,493
Accrued Interest Receivable..................... 825 825 642 642
Financial Liabilities
Demand and Savings Deposits..................... $(93,937) $(93,937) $(65,544) $(65,544)
Time Deposits................................... (57,544) (57,845) (53,561) (53,734)
Borrowings...................................... (10,685) (10,913) (8,860) (8,953)
Accrued Interest Payable........................ (244) (244) (192) (192)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used. The estimated fair value for cash and cash
equivalents is considered to approximate cost. The estimated fair value for
securities is based on quoted market values for the individual securities or for
equivalent securities. Carrying value is considered to approximate fair value
for accrued interest receivable, for deposit liabilities subject to immediate
withdrawal, and for accrued interest payable. The fair values of loans, time
deposits, and borrowings are approximated by calculating the sum of the carrying
value for amounts that contractually reprice at intervals less than six months
and the present value of cash flows using an estimated market discount interest
rate for amounts that reprice less frequently than every six months. The fair
values of unrecorded commitments at December 31, 1998 and 1997 are not material.
F-16
<PAGE> 67
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- FAIR VALUES OF FINANCIAL INSTRUMENTS -- CONTINUED
While these estimates are based on management's judgment of the appropriate
evaluation factors, there is no assurance that were such items liquidated the
estimated fair values would necessarily have been realized. The estimated fair
values should not be considered to apply at subsequent dates.
NOTE 14 -- REGULATORY MATTERS
The Bank and Bancorp are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet adequately capitalized
requirements could result in regulatory action that could have a direct material
effect on the financial statements.
The Office of the Comptroller of the Currency ("OCC") must approve the
declaration of any dividends for the Bank in excess of available retained
earnings and in excess of the sum of profits for the year combined with the
Bank's retained earnings from the two preceding years, less any required
transfer to surplus. In addition, dividends may not reduce capital levels below
the minimum regulatory requirements disclosed above. Under the most restrictive
of these requirements, Bancorp estimates retained earnings available for payment
of dividends by the Bank to Bancorp approximates $800,000 in order to maintain
the well capitalized status at year-end 1998.
The prompt corrective action regulations provide five regulatory capital
classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. These terms are
not intended to represent overall financial condition. The Bank met the
requirements of a well capitalized institution as defined above, at December 31,
1998 and 1997. If the Bank's capital classification were to change to adequately
capitalized, it would need to obtain regulatory approval to continue to accept
brokered deposits.
Actual and required capital amounts and ratios are presented below at
year-end. During 1998, Bancorp's consolidated assets surpassed $150 million for
the first time. As a result, the Federal Reserve will monitor the consolidated
capital position of Bancorp in addition to the capital position of the Bank.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1998
Total Capital to Risk Weighted Assets
Consolidated................................ $13.7 9.5% $11.5 8.0% $14.4 10.0%
Bank........................................ $15.2 10.6% $11.5 8.0% $14.4 10.0%
Tier 1 (Core) Capital to Risk Weighted Assets
Consolidated................................ $11.9 8.3% $ 5.8 4.0% $ 8.7 6.0%
Bank........................................ $10.0 6.9% $ 5.8 4.0% $ 8.6 6.0%
Tier 1 (Core) Capital to Average Assets
Consolidated................................ $11.9 7.0% $ 6.8 4.0% $ 8.5 5.0%
Bank........................................ $10.0 5.9% $ 6.8 4.0% $ 8.5 5.0%
</TABLE>
F-17
<PAGE> 68
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- REGULATORY MATTERS -- CONTINUED
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1997
Total Capital to Risk Weighted Assets
Bank........................................ $13.7 12.1% $ 9.1 8.0% $11.3 10.0%
Tier 1 (Core) Capital to Risk Weighted Assets
Bank........................................ $ 8.6 7.6% $ 4.5 4.0% $ 6.8 6.0%
Tier 1 (Core) Capital to Average Assets
Bank........................................ $ 8.6 6.5% $ 5.3 4.0% $ 6.6 5.0%
</TABLE>
NOTE 15 -- PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The following are condensed parent company only financial statements for
CNBC Bancorp.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................................... $ 347,044 $ 182,635
Investment in subsidiary:
Equity.................................................... 10,027,355 8,648,134
Subordinated Notes........................................ 3,700,000 3,700,000
Other Assets................................................ 119,405 128,748
----------- -----------
Total Assets...................................... $14,193,804 $12,659,517
=========== ===========
LIABILITIES
Loan Payable................................................ $ 2,000,000 $ 2,000,000
Other Liabilities........................................... 222,302 177,853
----------- -----------
Total Liabilities................................. 2,222,302 2,177,853
SHAREHOLDERS' EQUITY
Common Stock................................................ 8,379,375 8,349,051
Retained Earnings........................................... 3,579,127 2,133,913
Accumulated Other Comprehensive Income...................... 13,000 (1,300)
----------- -----------
Total Liabilities and Shareholders' Equity........ $14,193,804 $12,659,517
=========== ===========
</TABLE>
F-18
<PAGE> 69
CNBC BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Income
Dividends from Subsidiary................................. $ 400,000 $ 183,000
Interest Income........................................... 271,192 167,050
Other Income.............................................. 12,990 --
---------- ----------
Total Income...................................... 684,182 350,050
Expenses
Interest Expense.......................................... 152,146 105,292
Other Expense............................................. 47,741 16,417
---------- ----------
Total Expenses.................................... 199,887 121,709
---------- ----------
Income Before Income Taxes and Equity in Undistributed Net
Income of Subsidiary...................................... 484,295 228,341
Income Tax Expense.......................................... 24,730 15,450
---------- ----------
Income Before Equity in Undistributed Net Income of
Subsidiary................................................ 459,565 212,891
Undistributed Net Income of Subsidiary...................... 1,364,921 1,181,778
---------- ----------
Net Income.................................................. $1,824,486 $1,394,669
========== ==========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $1,824,486 $1,394,669
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities
Undistributed Net Income of Subsidiary.................... (1,364,921) (1,181,778)
Amortization.............................................. 8,040 8,040
Change in Other Assets and Liabilities.................... (5,167) (64,293)
---------- ----------
Net Cash from Operating Activities................... 462,438 156,638
Cash Flows from Investing Activities
Purchase of Subordinated Notes............................ -- (3,700,000)
---------- ----------
Net Cash from Investing Activities................... -- (3,700,000)
Cash Flows from Financing Activities
Cash Dividends Paid to Shareholders....................... (328,353) (316,966)
Proceeds from Loan Payable................................ 2,000,000
Proceeds from Stock Issuance.............................. 30,324 1,051,494
---------- ----------
Net Cash from Financing Activities................... (298,029) 2,734,528
---------- ----------
Net Change in Cash and Cash Equivalents..................... 164,409 (808,834)
Cash and Cash Equivalents
Beginning of Year......................................... 182,635 991,469
---------- ----------
End of Year............................................... $ 347,044 $ 182,635
========== ==========
</TABLE>
F-19
<PAGE> 70
APPENDIX A
STOCK SUBSCRIPTION APPLICATION
CNBC BANCORP
BY EXECUTING THIS STOCK SUBSCRIPTION APPLICATION, THE UNDERSIGNED
ACKNOWLEDGES HAVING RECEIVED, READ AND UNDERSTOOD THE CNBC BANCORP PROSPECTUS
DATED FEBRUARY , 1999 TOGETHER WITH ALL APPENDICES (THE "PROSPECTUS"), AND
THE UNDERSIGNED AGREES TO THE TERMS OF THE SUBSCRIPTION AGREEMENT, APPENDIX B TO
THE PROSPECTUS, WHICH IS INCORPORATED HEREIN BY REFERENCE.
The undersigned is aware that the purchase of the common shares involves a
high degree of risk.
The undersigned hereby subscribes for and offers to purchase the number of
common shares, no par value, of CNBC Bancorp ("common shares"), set forth below,
upon the terms and conditions specified in the prospectus and Subscription
Agreement at a purchase price of $30 per share. All subscriptions must be for a
minimum of 100 shares. NO FRACTIONAL SHARES WILL BE ISSUED.
The undersigned acknowledges and agrees that this application constitutes
an irrevocable offer and may not be withdrawn without the consent of CNBC
Bancorp. If any subscription is accepted only in part, any portion of funds not
required for partial subscription will be returned to the subscriber together
with interest earned on such portion. If any subscription is declined,
subscription funds will be returned upon declination, with any interest earned
thereon.
If this offering of common shares by CNBC Bancorp is canceled in its
entirety or CNBC rejects the application, this offer to purchase and subscribe
shall become void and any payments received from the subscriber will be returned
in full plus any interest earned on the amount returned. All such refunds will
be mailed immediately upon termination of the offering or rejection of the
application.
SUBSCRIPTIONS MAY BE MADE BY COMPLETING AND SIGNING THIS STOCK SUBSCRIPTION
APPLICATION IN TRIPLICATE AND DELIVERING ALL THREE COPIES TO: CNBC BANCORP,
ATTN: STOCK SUBSCRIPTION, 100 EAST WILSON BRIDGE ROAD, WORTHINGTON, OHIO 43085,
BY 5:00 P.M., EASTERN STANDARD TIME, WITHIN 90 DAYS OF THE DATE OF THE OFFERING,
UNLESS THIS DATE IS EXTENDED OR SHORTENED BY CNBC BANCORP, IN ITS DISCRETION.
THE STOCK SUBSCRIPTION APPLICATION MUST BE DELIVERED TOGETHER WITH A COMPLETED
FORM W-9 AND THE FULL AMOUNT OF THE PURCHASE PRICE FOR THE SHARES SUBSCRIBED, IN
UNITED STATES DOLLARS, BY CHECK, BANK DRAFT, OR MONEY ORDER, MADE PAYABLE TO
"DELAWARE COUNTY BANK AND TRUST COMPANY, ESCROW AGENT".
SHARE REGISTRATION. PLEASE CHECK AS APPROPRIATE AND WRITE OUT THE WAY IN
WHICH SHARES ARE TO BE REGISTERED:
[ ] INDIVIDUAL
[ ] JT TEN -- as joint tenants with right of survivorship and not as
tenants in common
[ ] TEN COM -- as tenants in common
[ ] TEN ENT -- as tenants by the entireties
Registration Name:
CHECK AS APPROPRIATE AND, IF CHECKED, COMPLETE AS INDICATED:
[ ] Uniform Gifts to Minors Act
- Name of custodian:
- Custodian for under Uniform Gifts to Minors
Act, State of .
A-1
<PAGE> 71
[ ] IRA, SEPP or Keogh Account #
- Brokerage Firm:
- Broker:
- Broker's Phone #:
- Custodian Firm
- Mailing Address of Broker or Custodian
Date of Subscription:
Number of Shares:
Amount of Subscription $:
Social Security Number or Tax ID Number or Registered owner(s):
Address of Registered Owner
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Telephone Numbers
Day:
Evening:
Funds Received from:
Check or Money Order number:
UPON CLOSING, ALL FUNDS RECEIVED FOR SUBSCRIPTIONS, WHICH ARE ACCEPTED BY
CNBC BANCORP, SHALL BECOME CAPITAL OF CNBC BANCORP TOGETHER WITH INTEREST
THEREON. THESE SECURITIES ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC.
I have read and hereby agree to the terms of this application and of the
Subscription Agreement (Appendix B of the prospectus), which is incorporated
herein by reference.
Signature of Purchaser
--------------------------------------
A-2
<PAGE> 72
APPENDIX B
CNBC BANCORP
COMMON STOCK SUBSCRIPTION AGREEMENT
This common Stock Subscription Agreement (the "Agreement") is entered into
by CNBC Bancorp, an Ohio corporation ("CNBC"), and each signatory (the
"purchaser") to a Subscription application (the "application"), which has been
accepted by CNBC in whole or in part.
SECTION 1. THE TERM OF THE OFFERING
The prospectus is dated February __, 1999. The offering commences this date
and shall remain open for up to 90 days except as follows: At the discretion of
CNBC, this offering may be terminated early at any time, or may be extended by
up to 30 days. Any extension or early termination of this offering is at the
discretion of CNBC.
SECTION 2. AUTHORIZATION AND SALE OF COMMON STOCK
2.1 Authorization. CNBC will authorize the issuance of up to 125,000 shares
of its no par value common stock (the "Shares") for sale and issuance to
investors including purchaser. Subject to the terms and conditions hereof and to
acceptance by CNBC, CNBC will issue and sell to purchaser a portion of the
Shares, as hereinafter provided, and purchaser will purchase the same from CNBC
at a purchase price of $30.00 per share.
2.2 Subscription. Purchaser shall subscribe to purchase ________________
Shares hereunder by executing and delivering an application to CNBC together
with a check payable to "The Delaware County Bank and Trust Company, Escrow
Agent," in the amount of the purchase price, together with a completed IRS Form
W-9, Request for Taxpayer Identification Number and Certification. CNBC's
address is:
CNBC Bancorp
Attn: Stock Subscription
100 East Wilson Bridge Road
Worthington, Ohio 43085
SECTION 3. ACCEPTANCE BY THE COMPANY
3.1 Irrevocable Offer. Purchaser acknowledges that his/her/its execution of
the application constitutes an irrevocable offer to purchase Shares as herein
indicated and that CNBC may accept such offer in whole or in part of may reject
it in its entirety.
3.2 Notice of Acceptance or Rejection. CNBC shall notify purchaser in
writing as to the extent to which purchaser's offer is accepted, not later than
fifteen days after the closing of the offering. To the extent purchaser's offer
is not accepted by CNBC, concurrently with such declination, Delaware County
Bank as Escrow Agent will return purchaser's unaccepted funds together with
interest earned thereon.
SECTION 4. PAYMENT INTO IMPOUND ACCOUNT; CLOSING
4.1 Delaware County Bank and Trust Company as Escrow Agent. All funds
received from Subscribers for CNBC's Shares, which meet the conditions of the
application and of this Agreement, will be deposited in a Federated Investors
money market mutual fund account (the "Impound Account"). The Impound Account
will be maintained by Delaware County Bank and Trust Company in the manner
provided in this Agreement ("Delaware County Bank and Trust Company as Escrow
Agent").
4.2 Closing. At the address noted above, CNBC will close the offering at
its discretion within 90 days of the date of the offering, unless it chooses to
extend the offering by 30 days, in which case it will close the offering within
120 days of the date of the offering. On the closing date, subscription funds in
the Impound Account
B-1
<PAGE> 73
(including any interest earned thereon) relating to applications accepted by
CNBC shall be released to CNBC in full.
4.3 Delivery of stock certificates. CNBC will mail to purchaser, within 15
business days after closing date, a stock certificate, registered in purchaser's
name, representing the respective Shares subscribed, against delivery of the
purchase price and any interest thereon.
SECTION 5. REPRESENTATION AND WARRANTIES OF THE PURCHASER
By signing the application, the purchaser represents and warrants to CNBC,
with respect to the purchase of the Shares, as follows:
5.1 Investment. Purchaser is acquiring Shares for investment for
purchaser's own account, not as a nominee or agent except as indicated in the
application, and not with the view to, or for resale in connection with, any
distribution thereof.
5.2 Limited Public Market. Purchaser understands that only a limited public
market now exists for any Shares to be issued by CNBC, and that CNBC has made no
assurances that a ready public market will ever exist for the Shares.
5.3 Access to Data. Purchaser acknowledges receipt of and has read CNBC's
prospectus dated February , 1999 to which this Agreement is appended.
5.4 Tax Consequences. Purchaser has reviewed with his/her/its own tax
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. Purchaser is
relying solely on such advisors and not on any statements or representations of
CNBC or any of its agents, and understands that purchaser (and not CNBC) shall
be responsible for purchaser's own tax liability that may arise as a result of
this investment or the transactions contemplated by this Agreement.
SECTION 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO CLOSE
CNBC's obligation to close the purchase and sale of Shares hereunder shall
be subject to the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties made by the purchaser in Section 3 hereof shall be true and
correct in all respects when made, and shall continue to be true and
correct in all respects on the closing date.
(b) Minimum Purchase. CNBC shall have received and accepted from
purchaser a subscription to purchase at least 100 Shares.
(c) Good Funds on Deposit. Delaware County Bank as Escrow Agent shall
be holding on deposit funds equal to at least the purchase price of the
Shares to be issued.
(d) Compliance with Securities Laws. CNBC and its counsel shall have
determined to their satisfaction, for the benefit of CNBC and not of
purchaser, that the sale of the Shares to each purchaser complies with all
applicable securities laws.
(e) Approvals and Permits. CNBC shall have received any approval or
permit that is deemed necessary or advisable by CNBC or its counsel.
SECTION 7. RETURN OF THE SUBSCRIPTION FUNDS
7.1 Declined Subscription. See 3.2 (Notice of Acceptance or Rejection). If
CNBC does not accept an application for any reason, then CNBC shall, within one
business day of its decision to decline, return to the subscriber the
subscription amount, plus any interest earned by the respective subscription
amount. Such refunds shall be mailed to the attention of the subscriber at the
address shown on the subscription application.
B-2
<PAGE> 74
7.2 Termination of Offering. If for any reason whatsoever, the offering
does not close by 90 days from the date of the offering (or by 30 days
thereafter, if CNBC elects to extend the offering), CNBC will deliver written
notice of such determination to purchaser, and will immediately return to
purchaser the amount of his/her/its deposit plus any interest earned thereon.
7.3 Tax Reporting. In the event that the Impound Account is distributed
pursuant to Section 5b, above, Delaware County Bank as Escrow Agent shall, as to
each Subscriber, file Forms 599 and 1099 with the State of Ohio and the Internal
Revenue Service, respectively.
SECTION 8. UNPAID CHECKS
In the event that any check received by Delaware County Bank as Escrow
Agent is returned unpaid by the drawee bank, Delaware County Bank as Escrow
Agent may return the check with the related application and a notice declining
the subscription.
SECTION 9. RIGHTS OF DELAWARE COUNTY BANK AS ESCROW AGENT
9.1 Conflicting Demands. If conflicting demands are made or notices served
upon Delaware County Bank as Escrow Agent with respect to the Impound Account,
Delaware County Bank as Escrow Agent shall be entitled to refuse to comply with
any such claim or demand and to suspend performance of this Agreement so long as
such disagreement shall continue; in so doing Delaware County Bank as Escrow
Agent shall not be or become liable for damages or interest to any person
(including but not limited to Subscribers) for failure to comply with such
conflicting or adverse demands. Delaware County Bank as Escrow Agent shall be
entitled to continue so to refrain and refuse so to act until:
(i) The rights of the adverse claimants have been finally adjudicated
in a court assuming and having jurisdiction of the parties and/or the
money, papers, and property involved in the claim or demand; and/or
(ii) All differences have been settled by mutual agreement and
Delaware County Bank as Escrow Agent has been notified of the settlement in
writing, signed by all of the interested persons.
9.2 Depository. Delaware County Bank as Escrow Agent shall act as a
depository only and is not responsible or liable in any manner whatever for the
sufficiency, correctness, genuineness or validity of any instrument deposited
with it pursuant to this Agreement, or with respect to the form or execution of
any such instrument, or the identity, authority, or rights of any person
executing or depositing any such instrument.
9.3 Written Notice. No notice, demand or change of instructions shall be of
any effect unless made in a writing signed by all parties to the application and
mailed or delivered to an authorized officer of Delaware County Bank as Escrow
Agent at its office in Delaware, Ohio.
9.4 Entitlements. Delaware County Bank as Escrow Agent:
(i) shall be entitled to consult with legal counsel and shall not be
liable for any action taken or omitted by that counsel;.
(ii) shall not, by act, delay, omission or otherwise, be deemed to
have waived any rights or remedies under this Agreement unless such waiver
is in a writing signed by Delaware County Bank as Escrow Agent; a waiver by
Delaware County Bank as Escrow Agent of any right or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right or
remedy on any future occasion.
9.5 Good Faith. Delaware County Bank as Escrow Agent shall not be liable
for any action taken or omitted to be taken in good faith, and shall be liable
only for its own gross negligence or willful misconduct;
9.6 Reliance. Delaware County Bank as Escrow Agent shall be entitled to
rely on any paper, request, certificate, schedule, notice or other document
which it in good faith believes to be genuine and to have been signed or adopted
by the proper party or parties;
9.7 Risk. Delaware County Bank as Escrow Agent shall under no circumstances
be required to risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, if it shall have
B-3
<PAGE> 75
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it;
9.8 Duty. Delaware County Bank as Escrow Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement, and the
permissive right of Delaware County Bank as Escrow Agent to do things or omit to
do things as set forth in this Agreement shall not be construed as a duty.
SECTION 10. MISCELLANEOUS
10.1 Notice. Any notice, report, demand, waiver or consent required or
permitted to this Agreement shall be in writing and shall be given by prepaid
first class mail, addressed as follows:
CNBC Bancorp
100 East Wilson Bridge Road
Worthington, Ohio 43085
10.2 Governing Law. Any disputes arising under this Agreement shall be
governed in all respects by the laws of the State of Ohio.
10.3 Survival. The representatives, warranties, covenants and agreements
made herein and in the Subscription application shall survive the closing of the
transactions contemplated hereby.
10.4 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
10.5 Entire Agreement; Amendment. This Agreement, its attachments and the
other documents, including particularly the application, constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
10.6 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand, messenger or
facsimile, addressed (a) if to a purchaser, at such purchaser's address set
forth on the signature page of the application, or at such other address as such
purchaser shall have furnished to CNBC in writing, or (b) if to CNBC, to its
address set forth in Section 11.1 of this Agreement and addressed to the
attention of the President, or at such other address as CNBC shall have
furnished to the purchasers, with copy sent to M. Patricia Oliver, Squire,
Sanders & Dempsey L.L.P., 4900 Key Tower, 127 Public Square, Cleveland, Ohio
44114.
10.7 Expenses. CNBC and the purchaser shall each bear its own expenses
incurred on its behalf with respect to this Agreement and the transactions
contemplated hereby.
10.8 Counterparts. The application may be executed in counterparts, each of
which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
10.9 Severability. In the event that any provision of this Agreement or the
application becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
10.10 Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
B-4
<PAGE> 76
10.11 Finder's Fee. CNBC and each purchaser agree to indemnify and hold
each other harmless from and liability for any commission or compensation in the
nature of a finder's fee (and the costs and expenses of defending against such
liability or asserted liability) for which CNBC or such purchaser or any of
their respective officers, agents, representatives or employees is responsible
in connection with this transaction.
10.12 Form W-9. Purchaser will complete, execute and deliver to CNBC Form
W-9, Request for Taxpayer Identification Number and Certification.
B-5
<PAGE> 77
<TABLE>
<S> <C> <C>
FORM W-9 REQUEST FOR TAXPAYER Give form to the
(Rev. December 1996) IDENTIFICATION NUMBER AND CERTIFICATION requester.
Department of the Do NOT send to the IRS.
Treasury Internal Revenue
Service
</TABLE>
PLEASE PRINT OR TYPE
Name (if a joint account or you changed your name, see SPECIFIC
INSTRUCTIONS on page 2.)
Business name, if different from above. (See SPECIFIC INSTRUCTIONS on page
2.)
CHECK appropriate BOX: [ ] Individual/Sole
proprietor [ ] Corporation [ ] Partnership [ ] Other -
Address (number, street, and apt. or suite no.)
City, State, And ZIP Code
Requester's name and address (optional)
TAXPAYER IDENTIFICATION NUMBER (TIN)
<TABLE>
<S> <C> <C>
Enter your TIN in the appropriate box. For individuals, this is your social security Social Security number
number (SSN). However, if you are a resident alien OR a sole proprietor, see the --------------------------
instructions on page 2. For other entities, it is your employer identification number - -
(EIN). If you do not have a number, see HOW TO GET A TIN on page 2. --------------------------
NOTE: IF the account is in more than one name, see the chart on page 2 for guidelines on OR
whose number to enter Employer identification
number
--------------------------
-
--------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
List account number(s) here (optional)
FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING (See the instructions on page
2.)
CERTIFICATION
Under penalties of perjury, I certify that:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me) and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
(IRS) that I am subject to backup withholding as a result of a failure to
report all interest or dividends, (c) the IRS has notified me that I am no
longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS. -- You must cross out item 2 above if you have been
notified by the IRS that you are currently subject to backup withholding because
you have failed to report all interest and dividends on your tax return. For
real estate transactions, item 2 does not apply. For mortgage interest paid,
acquisition or abandonment of secured property, cancellation of debt,
contributions to an individual retirement arrangement (IRA), and generally,
payments other than interest and dividends, you are not required to sign the
Certification, but you must provide your correct TIN. (See the instructions on
page 2.)
- --------------------------------------------------------------------------------
SIGN
HERE Signature -- Date --
- --------------------------------------------------------------------------------
<PAGE> 78
PURPOSE OF FORM. -- A person who is required to file an information return with
the IRS must get your correct taxpayer identification number (TIN) to report,
for example, income paid to you, real estate transactions, mortgage interest you
paid, acquisition or abandonment of secured property, cancellation of debt, or
contributions you made to an IRA.
Use Form W-9 to give your correct TIN to the person requesting it (the
requester) and, when applicable, to:
1. Certify the TIN you are giving is correct (or you are waiting for a
number to be issued),
2. Certify you are not subject to backup withholding, or
3. Claim exemption from backup withholding if you are an exempt payee.
NOTE: If a requester gives you a form other than a W-9 to request your TIN, you
must use the requester's form if it is substantially similar to this Form W-9.
WHAT IS BACKUP WITHHOLDING? -- Persons making certain payments to you must
withhold and pay to the IRS 31% of such payments under certain conditions. This
is called "backup withholding." Payments that may be subject to backup
withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee pay, and certain payments from
fishing boat operators. Real estate transactions are not subject to backup
withholding.
If you give the requester your correct TIN, make the proper certifications,
and report all your taxable interest and dividends on your tax return, payments
you receive will not be Subject to backup withholding. Payments you receive WILL
be subject to backup withholding if:
1. You do not furnish your TIN to the requester, or
2. The IRS tells the requester that you furnished an incorrect TIN, or
3. The IRS tells you that you are subject to backup withholding because you
did not report all your interest and dividends on your tax return (for
reportable interest and dividends only), or
4. You do not certify to the requester that you are not subject to backup
withholding under 3 above (for reportable interest and dividend accounts opened
after 1983 only), or
5. You do not certify your TIN when required. See the Part III instructions
on page 2 for details.
Certain payees and payments are exempt from backup withholding. See the Part
II instructions and the separate INSTRUCTIONS FOR THE REQUESTER OF FORM W-9.
PENALTIES
FAILURE TO FURNISH TIN. -- IF you fail to furnish your correct TIN to a
requester, you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect.
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make
a false statement with no reasonable basis that results in no backup
withholding, you are subject to a $500 penalty.
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
MISUSE OF TINS. -- If the requester discloses or uses TINs in violation of
Federal law, the requester may be subject to civil and criminal penalties.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Cat. No. 10231X Form W-9 (Rev. 12-96)
</TABLE>
<PAGE> 79
SPECIFIC INSTRUCTIONS
NAME. -- If you are an individual, you must generally enter the name shown on
your social security card. However, if you have changed your last name, for
instance, due to marriage, without informing the Social Security Administration
of the name change, enter your first name, the last name shown on your social
security card, and your new last name.
If the account is in joint names, list first and then circle the name of the
person or entity whose number you enter in Part I of the form.
Sole Proprietor. -- You must enter your INDIVIDUAL name as shown on your social
security card. You may enter your business, trade, or "doing business as" name
on the BUSINESS NAME line.
Other Entities. -- Enter the business name as shown on required Federal tax
documents. This name should match the name shown on the charter or other legal
document creating the entity. You may enter any business, trade, or "doing
business as" name on the business name line.
PART I -- TAXPAYER IDENTIFICATION NUMBER (TIN)
You must enter your TIN in the appropriate box. If you are a resident alien and
you do not have and are not eligible to get an SSN, your TIN is your IRS
individual taxpayer identification number (ITIN). Enter it in the social
security number box. If you do not have an ITIN, see HOW TO GET A TIN below.
If you are a sole proprietor and you have an EIN, you may enter either your SSN
or EIN. However, using your EIN may result in unnecessary notices to the
requester.
NOTE: See the chart on this page for further clarification of name and TIN
combinations.
HOW TO GET A TIN. -- IF you do not have a TIN, apply for one immediately. To
apply for an SSN, get FORM SS-5 from your local Social Security Administration
office. Get FORM W-7 to apply for an ITIN or FORM SS-4 to apply for an EIN. You
can get Forms W-7 and SS-4 from the IRS by calling 1-800-TAX-FORM
(1-800-829-3676).
IF you do not have a TIN, write "Applied For" in the space for the TIN, sign and
date the form, and give it to the requester. For interest and dividend payments,
and certain payments made with respect to readily tradable instruments, you will
generally have 60 days to get a TIN and give it to the requester. Other payments
are subject to backup withholding.
NOTE: Writing "Applied For" means that you have already applied for a TIN OR
that you intend to apply for one soon.
PART II -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING
Individuals (including sole proprietors) are NOT exempt from backup withholding.
Corporations are exempt from backup withholding for certain payments, such as
interest and dividends. For more information on exempt payees, see the separate
Instructions for the Requester of Form W-9.
If you are exempt from backup withholding, you should still complete this form
to avoid possible erroneous backup withholding. Enter your correct TIN in Part
I, write "Exempt" in Part II, and sign and date the form.
IF you are a nonresident alien or a foreign entity not subject to backup
withholding, give the requester a completed FORM W-8, Certificate of Foreign
Status.
PART III -- CERTIFICATION
For a joint account, only the person whose TIN is shown in Part I should
sign (when required).
1. INTEREST, DIVIDEND, AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE 1984 AND
BROKER ACCOUNTS CONSIDERED ACTIVE DURING 1983. You must give your correct TIN,
but you do not have to sign the certification.
2. INTEREST, DIVIDEND, BROKER, AND BARTER EXCHANGE ACCOUNTS OPENED AFTER
1983 AND BROKER ACCOUNTS CONSIDERED INACTIVE DURING 1983. You must sign the
certification or backup withholding will apply. IF you are subject to backup
withholding and you are merely providing your correct TIN to the requester, you
must cross out item 2 in the certification before signing the form.
3. REAL ESTATE TRANSACTIONS. You must sign the certification. You may cross
out item 2 of the certification.
4. OTHER PAYMENTS. You must give your correct TIN, but you do not have to
sign the certification unless you have been notified that you have previously
given an incorrect TIN. "Other payments" include payments made in the course of
the requester's trade or business for rents, royalties, goods (other than bills
for merchandise), medical and health care services (including payments to
corporations), payments to a nonemployee for services (including attorney and
accounting fees), and payments to certain fishing boat crew members.
5. MORTGAGE INTEREST PAID BY YOU, ACQUISITION OR ABANDONMENT OF SECURED
PROPERTY, CANCELLATION OF DEBT, OR IRA CONTRIBUTIONS. You must give your correct
TIN, but you do not have to sign the certification.
PRIVACY ACT NOTICE
Section 6109 of the Internal Revenue Code requires you to give your correct TIN
to persons who must file information returns with the IRS to report interest,
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, cancellation of debt, or
contributions you made to an IRA. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. The IRS may also
provide this information to the Department of Justice for civil and criminal
litigation and to cities, states, and the District of Columbia to carry out
their tax laws.
You must provide your TIN whether or not you are required to file a tax return.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not give a TIN to a payer. Certain penalties
may also apply.
<PAGE> 80
WHAT NAME AND NUMBER TO GIVE THE REQUESTER
<TABLE>
<CAPTION>
- -------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE NAME AND SSN OF:
- -------------------------------------------------------------
<C> <S> <C>
1. Individual The individual
2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds, the first
individual on the account
(1)
3. Custodian account of a The minor (2)
minor (Uniform Gift to
Minors Act)
4. a. The usual revocable The grantor-trustee (1)
savings trust (grantor is
also trustee)
b. So-called trust account The actual owner (1)
that is not a legal or
valid trust under state
law
5. Sole proprietorship The owner (3)
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE NAME AND EIN OF:
- -------------------------------------------------------------
<C> <S> <C>
6. Sole proprietorship The owner (3)
</TABLE>
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE NAME AND EIN OF:
- -------------------------------------------------------------
- -------------------------------------------------------------
<C> <S> <C>
7. A valid trust, estate, or Legal entity (4)
pension trust
8. Corporate The corporation
9. Association, club, The organization
religious, charitable,
educational, or other
tax-exempt organization
10. Partnership The partnership
11. A broker or registered The broker or nominee
nominee
12. Account with the The public entity
Department of Agriculture
in the name of a public
entity (such as a state or
local government, school
district, or prison) that
receives agricultural
program payments
</TABLE>
- --------------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has an SSN, that person's number must be
furnished.
(2) Circle the minor's name and furnish the minor's SSN.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your SSN or EIN (if you have
one).
(4) List first and circle the name of the legal trust, estate, or pension trust
(Do not furnish the TIN of the personal representative or trustee unless the
legal entity itself is not designated in the account title.)
NOTE. If no name is circled when more than one name is listed, the number will
be considered to be that of the first name listed.
<PAGE> 81
PART II TO FORM SB-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Section 1701.13(E) of the Ohio Revised Code, Section 33 of
the Company's Code of Regulations ("Section 33") provides that directors and
officers of the Company may, under certain circumstances, be indemnified against
expenses (including attorneys' fees) and from other liabilities actually and
reasonably incurred by them as a result of any suit brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, if they
had no reasonable cause to believe their conduct was unlawful. Section 33 also
provides that directors and officers may also be indemnified against expenses
(including attorneys' fees) incurred by them in connection with a derivative
suit if they acted in good faith and in a manner they reasonably believed to be
in or not opposed to the best interests of the corporation, except that no
indemnification may be made without court approval if such person was adjudged
liable to the corporation.
The Company has purchased director and officer liability insurance in the
amount of $5 million covering its current executive officers and directors.
RECENT SALES OF UNREGISTERED SECURITIES
In October 1997, the Company sold 50,000 Common Shares at an adjusted price
of $20.00 per share to various individuals and companies, including some
directors, totaling $1,000,000, in an offering exempt from registration under
Rule 504 of Regulation D and Section 3(b) of the Securities Act. No underwriters
were involved in the sale and no underwriting discounts or commissions were
paid.
During 1997 the Bank issued $3,700,000 of Subordinated Notes to the Company
in 3 separate offerings exempt from registration under Rule 506 of Regulation D
and Section 4(2) of the Securities Act. No underwriters were involved in the
sale and no underwriting discounts on commissions were paid.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses of the
Company in connection with the Offering other than underwriting discounts.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 1,043
Legal Fees and Expenses..................................... 30,000
Accounting Fees and Expenses................................ 5,000
Printing and Engraving Expenses............................. 2,500
Blue Sky Fees and Expenses.................................. 1,000
Miscellaneous............................................... 4,457
-------
Total....................................................... $44,000
=======
</TABLE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The information required by this Item 21(a) is set forth in the Index to
Exhibits accompanying this Registration Statement and is incorporated herein by
reference.
II-1
<PAGE> 82
(b) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules listed below follow:
UNDERTAKINGS
1. The undersigned Registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and,
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. The undersigned Registrant hereby undertakes to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
4. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
5. The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or Rule 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Worthington and State of Ohio on February 19, 1999.
CNBC BANCORP,
an Ohio corporation
By: /s/ THOMAS D. MCAULIFFE
----------------------------------------
Thomas D. McAuliffe
Chief Executive Officer
and President
By: /s/ JOHN ROMELFANGER
----------------------------------------
John Romelfanger
Vice President, Secretary and Treasurer
(Principal Accounting Officer)
II-3
<PAGE> 84
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints THOMAS D. MCAULIFFE and JOHN ROMELFANGER, and each of them, his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Form SB-2 Registration Statement, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming that all such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----------------------------------- -----------------
<C> <S> <C>
/s/ THOMAS D. MCAULIFFE Chairman of the Board of Directors, November 17, 1998
- ----------------------------------- President and Chief Executive
Thomas D. McAuliffe Officer (Principal Executive
Officer)
/s/ JOHN ROMELFANGER Vice President, Secretary and November 17, 1998
- ----------------------------------- Treasurer (Principal Financial and
John Romelfanger Accounting Officer)
/s/ DANIEL M. MAHONEY Director, Vice President and Senior November 17, 1998
- ----------------------------------- Lending Officer
Daniel M. Mahoney
/s/ LORETTO (LARRY) V. CANINI Director November 17, 1998
- -----------------------------------
Loretto (Larry) V. Canini
/s/ MARK S. CORNA Director November 17, 1998
- -----------------------------------
Mark S. Corna
/s/ JAMESON CRANE, JR. Director November 17, 1998
- -----------------------------------
Jameson Crane, Jr.
/s/ JUDITH A. DEVILLERS Director November 17, 1998
- -----------------------------------
Judith A. DeVillers
/s/ GEORGE A. GUMMER Director November 17, 1998
- -----------------------------------
George A. Gummer
/s/ WILLIAM L. HOY Director November 17, 1998
- -----------------------------------
William L. Hoy
Director November , 1998
- -----------------------------------
Douglas W. James
/s/ DONALD R. KENNEY Director November 17, 1998
- -----------------------------------
Donald R. Kenney
/s/ SAMUEL E. MCDANIEL Director November 17, 1998
- -----------------------------------
Samuel E. McDaniel
/s/ RICHARD F. RUHL Director November 17, 1998
- -----------------------------------
Richard F. Ruhl
/s/ DAVID J. RYAN Director November 17, 1998
- -----------------------------------
David J. Ryan
Director November , 1998
- -----------------------------------
Peter C. Taub
</TABLE>
II-4
<PAGE> 85
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----------------------------------- -----------------
<C> <S> <C>
/s/ JOHN A. TONTI Director November 17, 1998
- -----------------------------------
John A. Tonti
/s/ ALAN R. WEILER Director November 17, 1998
- -----------------------------------
Alan R. Weiler
/s/ MICHAEL WREN Director November 17, 1998
- -----------------------------------
Michael Wren
</TABLE>
II-5
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
- --------- -----------
<C> <S>
*3.1 Articles of Incorporation of CNBC Bancorp
*3.2 Regulations of CNBC Bancorp
*4.1 Form of CNBC Bancorp Common Share Certificate
*5 Opinion of Squire, Sanders & Dempsey L.L.P. as to the
legality of the Common Shares being registered (including
consents)
10.1 Employment Agreement dated as of March 1, 1998 as amended
and restated effective December 31, 1998, by and between and
among Commerce National Bank, CNBC Bancorp and Thomas D.
McAuliffe
*10.2 Form of Indemnification Agreement between CNBC Bancorp and
its directors, officers and certain representatives
*10.3 Non-Qualified Stock Option Plan
*10.4 Form of Deferred Compensation Agreement
*21 Subsidiaries of CNBC Bancorp
*23.1 Consent of Squire, Sanders & Dempsey L.L.P. (see Exhibit 5)
23.2 Consent of Crowe, Chizek and Company L.L.P.
24 Power of Attorney (included in Part II of the Registration
Statement)
27 Financial Data Schedule
99 Form of Escrow Agreement between CNBC Bancorp and Delaware
County Bank and Trust Company
</TABLE>
- ---------------
* Denotes previously EDGAR filed as part of this Registration Statement, File
No. 333-68797.
II-6
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation in this Registration Statement of CNBC Bancorp
on Amendment 1 to Form SB-2 of our report dated February 5, 1999, on the 1998
and 1997 consolidated financial statements of CNBC Bancorp appearing in this
Registration Statement. We also consent to the reference to our firm under the
heading "Experts" in the prospectus, which is part of the Registration
Statement.
Crowe, Chizek and Company LLP
Columbus, Ohio
February 19, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,256
<INT-BEARING-DEPOSITS> 7,390
<FED-FUNDS-SOLD> 4,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,218
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 150,936
<ALLOWANCE> 2,055
<TOTAL-ASSETS> 175,113
<DEPOSITS> 151,480
<SHORT-TERM> 0
<LIABILITIES-OTHER> 976
<LONG-TERM> 10,685
0
0
<COMMON> 8,379
<OTHER-SE> 3,592
<TOTAL-LIABILITIES-AND-EQUITY> 175,113
<INTEREST-LOAN> 11,710
<INTEREST-INVEST> 302
<INTEREST-OTHER> 715
<INTEREST-TOTAL> 12,727
<INTEREST-DEPOSIT> 5,605
<INTEREST-EXPENSE> 6,220
<INTEREST-INCOME-NET> 6,506
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,481
<INCOME-PRETAX> 2,794
<INCOME-PRE-EXTRAORDINARY> 2,794
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,824
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.48
<YIELD-ACTUAL> 8.51
<LOANS-NON> 80
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 876
<ALLOWANCE-OPEN> 1,600
<CHARGE-OFFS> 25
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,055
<ALLOWANCE-DOMESTIC> 1,604
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 451
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,085
<INT-BEARING-DEPOSITS> 5,975
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,051
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 118,678
<ALLOWANCE> 1,600
<TOTAL-ASSETS> 139,325
<DEPOSITS> 119,105
<SHORT-TERM> 0
<LIABILITIES-OTHER> 877
<LONG-TERM> 8,860
0
0
<COMMON> 8,349
<OTHER-SE> 2,133
<TOTAL-LIABILITIES-AND-EQUITY> 139,325
<INTEREST-LOAN> 9,160
<INTEREST-INVEST> 212
<INTEREST-OTHER> 358
<INTEREST-TOTAL> 9,730
<INTEREST-DEPOSIT> 4,137
<INTEREST-EXPENSE> 4,624
<INTEREST-INCOME-NET> 5,106
<LOAN-LOSSES> 386
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,769
<INCOME-PRETAX> 2,140
<INCOME-PRE-EXTRAORDINARY> 2,140
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,395
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 8.81
<LOANS-NON> 100
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 102
<ALLOWANCE-OPEN> 1,264
<CHARGE-OFFS> 50
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,600
<ALLOWANCE-DOMESTIC> 1,232
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 368
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,248
<INT-BEARING-DEPOSITS> 6,891
<FED-FUNDS-SOLD> 3,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,130
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 86,351
<ALLOWANCE> 1,264
<TOTAL-ASSETS> 104,207
<DEPOSITS> 90,377
<SHORT-TERM> 0
<LIABILITIES-OTHER> 649
<LONG-TERM> 4,884
0
0
<COMMON> 7,298
<OTHER-SE> 1,000
<TOTAL-LIABILITIES-AND-EQUITY> 104,207
<INTEREST-LOAN> 7,041
<INTEREST-INVEST> 223
<INTEREST-OTHER> 415
<INTEREST-TOTAL> 7,679
<INTEREST-DEPOSIT> 3,391
<INTEREST-EXPENSE> 3,705
<INTEREST-INCOME-NET> 3,975
<LOAN-LOSSES> 254
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,246
<INCOME-PRETAX> 1,635
<INCOME-PRE-EXTRAORDINARY> 1,635
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,063
<EPS-PRIMARY> 1.02
<EPS-DILUTED> .95
<YIELD-ACTUAL> 8.63
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,010
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,264
<ALLOWANCE-DOMESTIC> 857
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 407
</TABLE>
<PAGE> 1
ESCROW AGREEMENT
----------------
ESCROW AGREEMENT, dated this _____ day of __________, 1999, by and
between CNBC BANCORP, an Ohio corporation ("CNBC"), and THE DELAWARE COUNTY BANK
AND TRUST COMPANY (the "Escrow Agent").
WITNESSETH:
-----------
WHEREAS, CNBC proposes to offer a maximum of 125,000 shares of its no
par value common stock for sale and issuance to investors at a price of $30.00
per share to be sold in minimum lots of 100 shares as set forth in the terms of
the common stock subscription agreement dated the _____ day of __________, 1999
(the "Offering"); and
WHEREAS, until the Offering is completed or terminated, CNBC desires to
place all proceeds from the sale of such shares in escrow with Escrow Agent;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. CNBC hereby appoints The Delaware County Bank and Trust Company as
Escrow Agent to hold certain funds deposited on behalf of CNBC with the Escrow
Agent in escrow pursuant to the terms of this Agreement.
2. Escrow Agent shall establish an interest-bearing account or a money
market account with Federated Investors through its trust department entitled
CNBC Bancorp, Escrow Account. CNBC has reviewed the Federated Investors money
market fund and the prospectus relating thereto and certifies that it is a
permissible investment under the appropriate SEC rules. Interest will be paid on
the escrow funds based on the average monthly interest paid to the Escrow Agent
by Federated Investors. Interest will be computed from the time the escrow funds
are placed in escrow until said funds are disbursed pursuant to this Agreement.
3. CNBC shall deliver all monies received for the payment of shares
purchased in connection with the Offering to the Escrow Agent for deposit into
the Escrow Account, together with a written account of each sale, which account
shall set forth the purchaser's name, address and social security number, the
number of shares purchased, the amount paid for such shares, and whether the
consideration received was in the form of a check, draft or money order. CNBC
shall instruct purchasers to make checks for the shares purchased payable to the
order of the Escrow Agent. Any checks received which are made payable to any
party other than the Escrow Agent shall be returned to the purchaser who
submitted the check and not accepted.
4. The escrow period shall begin with the commencement of the Offering
and shall terminate upon the earlier to occur of the following dates:
<PAGE> 2
(a) A date ninety (90) days from the date the Offering
initially commences, said date to be the _____ day of __________, 1999;
(b) A date thirty (30) days from the original ninety-day
period, if extended by CNBC at its discretion, i.e., one hundred twenty (120)
days from the date the Offering initially commences; or
(c) A date prior to either of the above dates if elected by
CNBC to terminate said Offering.
During the escrow period, CNBC is aware and understands that it is not entitled
to any funds received into escrow and no amounts deposited into the Escrow
Account shall become the property of CNBC, or any other entity, or be subject to
the debts of CNBC.
5. At the close of the Offering period, whether that be 90 days after
the initial Offering commences, 120 days after the initial Offering commences,
or upon early termination by CNBC, whichever occurs first, Escrow Agent shall
deliver to CNBC those funds in the Escrow Account relating to applications
accepted by CNBC. Escrow Agent shall refund to each subscriber, together with
interest upon said amount, all funds rejected by CNBC. The acceptance or
rejection of subscribers' funds shall be made solely by CNBC, and Escrow Agent
shall act in accordance with the instructions of CNBC with regard to the
disbursement of said funds. Only in the event the entire Offering is terminated
shall all funds be refunded to subscribers.
6. The Escrow Agent is hereby authorized to forward each check for
collection and, upon collection of the proceeds of each check, deposit the
collected proceeds into the Escrow Account. As an alternative, the Escrow Agent
may telephone the bank on which the check is drawn to confirm that the check has
been paid.
Any check returned unpaid to the Escrow Agent shall be returned to the
purchaser that submitted the check. In such case, the Escrow Agent shall
promptly notify CNBC of such return.
If CNBC rejects any purchase by a purchaser for which the Escrow Agent
has already collected funds, the Escrow Agent shall promptly issue a refund
check to the rejected purchaser. If CNBC rejects any purchase by a purchaser for
which the Escrow Agent has not yet collected funds but has submitted the
purchaser's check for collection, the Escrow Agent shall promptly remit the
purchaser's check directly to the purchaser. The Escrow Agent's obligations
under this Section 6 to return funds and/or checks to purchasers shall not
commence until the Escrow Agent has received proper instructions and the
necessary information from CNBC.
7. For its services hereunder, the Escrow Agent shall receive a fee
from CNBC of _____________________________ Dollars ($__________) payable upon
execution of this Agreement and the balance to be payable at the termination of
the Offering, plus all out-of-pocket expenses for postage and preparation of
1099s.
-2-
<PAGE> 3
8. The Escrow Agent shall not:
(a) Incur any liability whatsoever except for willful
misconduct or gross negligence so long as the Escrow Agent shall have acted in
good faith; or
(b) Have any obligation in respect of the escrow funds, other
than to faithfully follow the provisions of the Agreement; or
(c) Be required to defend any legal proceedings which may be
instituted against it in respect of this Agreement unless indemnified to the
satisfaction of the Escrow Agent against the costs and expenses of such defense,
including reasonable fees of legal counsel; or
(d) Be required to institute legal proceedings of any kind. In
the event that any legal action is instituted against the Escrow Agent in its
capacity as Escrow Agent, the Escrow Agent may interplead CNBC in such action
and may deposit with the Court in which such action is pending the escrow funds
which are the subject of such action, and, in such event, the Escrow Agent shall
thereupon be relieved of and discharged from any and all obligations and
liabilities under and pursuant to this Agreement in respect to such funds so
deposited with said Court; or
(e) Be required to be familiar with the provisions of any
other instruments or agreement shall as offering circulars or subscription
agreements, and shall not be responsible for any representations, warranties or
covenants in any other instruments or agreements.
9. Miscellaneous provisions:
(a) All notices, requests, instructions or other
communications required or permitted to be given under this Agreement shall be
given in writing and shall be deemed to have been duly given if delivered by
hand, or mailed by certified mail, postage prepaid, to each party as follows:
CNBC Bancorp
Attention: John Romelfanger, CFO
100 E. Wilson Bridge Road
Worthington, Ohio 43085
The Delaware County Bank and Trust Company
Attention: Thomas R. Whitney
P.O. Box 1039
Delaware, Ohio 43015
Any party to this Agreement may, by notice given to the party, in accordance
with this Section 9, designate a new address for giving of notice, requests,
instructions or other communications to such designating party. Anything
contained in this Section 9 or elsewhere
-3-
<PAGE> 4
to the contrary notwithstanding, notice of any action may be given to any party
hereto by mailing a copy of said notice by certified mail, postage prepaid, to
the last known address of such party, and any notice so given shall be deemed to
have been duly given when deposited in the mail.
(b) This Agreement may be amended from time to time by any
agreement in writing executed by all of the parties hereto, but no such
amendment shall materially alter or change the substance or effect of this
Agreement nor be prohibited by law.
(c) This Agreement shall be construed and interpreted under
and governed and enforced in accordance with the laws of the State of Ohio.
(d) This Agreement shall inure to the benefit of and be
binding upon the representatives, successors and assigns of each of the parties
hereto.
(e) This Agreement may be executed in one or more
counterparts, all of which shall be deemed to be an original, but all of which
taken together shall be deemed to constitute a single instrument.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
CNBC BANCORP
____________________________ By _________________________________
Witness
Title:______________________________
THE DELAWARE COUNTY BANK
AND TRUST COMPANY
_____________________________ By: ________________________________
Witness
Title:______________________________
-4-
