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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
{X} Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1996
OR
{ } Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________.
CNB Bancshares, Inc. 0-11510
(Exact name of registrant as (Commission file number)
specified in its charter)
Indiana 35-1568731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 N.W. Third Street, Evansville, Indiana 47739
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 464-3400
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. {X}
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $626,849,000 as of March 6, 1997.
The number of shares outstanding of the registrant's common stock, without
par value, as of March 6, 1997, was 19,813,693 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996. (Part I, Part II and Part IV)
(2) Portions of the Registrant's Proxy Statement for Annual Meeting of
Shareholders to be held April 22, 1997. (Part III)
Exhibit index is on page 17.
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PART I
ITEM 1. BUSINESS
Overview
CNB Bancshares, Inc. (the Corporation), is a regional, multi-bank holding
company headquartered in Evansville, Indiana. Incorporated on May 26, 1983,
under the laws of the State of Indiana, the Corporation began operating in 1984
as a one-bank holding company for The Citizens National Bank of Evansville
(Citizens), which was chartered in 1874. Since that time, the Corporation has
acquired additional financial subsidiaries and currently owns six commercial
banks and one consumer finance company. Certain of the acquired subsidiaries
have subsequently been merged into other subsidiaries of the Corporation. With
assets of $2,056,129,000 at December 31, 1996, Citizens remains the lead bank
and largest of the Corporation's subsidiaries. As of December 31, 1996, the
Corporation had consolidated total assets of $4,117,989,000 and total
shareholders' equity of $312,298,000.
The Corporation's banking and finance subsidiaries are listed below:
<TABLE>
<CAPTION>
Financial Principal Year Year Number of Total Total
Subsidiary Office Organized Acquired Locations* Assets# Equity#
---------- --------- --------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
The Citizens National Evansville,
Bank of Evansville Indiana 1874 1984 28 $2,056,129 $136,978
Citizens Bank of Madisonville,
Kentucky Kentucky 1929 1986 20 626,058 50,870
Citizens Bank of Western Terre Haute,
Indiana Indiana 1890 1990 13 379,358 30,926
Citizens Bank of Jasper Jasper,
Indiana 1978 1991 2 113,442 7,950
Citizens Bank of Greenwood,
Central Indiana Indiana 1933 1992 20 608,369 35,869
Peoples Security Finance Madisonville,
Company Kentucky 1971 1993 34 54,993 7,085
Citizens Bank of Mt. Vernon,
Illinois, N.A. Illinois 1937 1993 10 560,559 36,825
</TABLE>
*Number of offices does not include off-site ATM's or non-banking locations.
#Dollar amounts are reported in thousands.
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The Corporation's financial subsidiaries are engaged in commercial and
retail banking, consumer lending, mortgage lending and servicing, trust services
and cash management services for corporate accounts and other banks. Through its
financial subsidiaries, the Corporation has 127 offices throughout its primary
market areas of Indiana, Illinois, Kentucky and portions of Tennessee.
The Corporation's financial subsidiaries offer a broad range of deposit,
loan and other banking products and services to their customers. Deposit
products include certificates of deposit, individual retirement accounts and
other time deposits, checking and other demand deposit accounts, including NOW
accounts, and savings and money market accounts. Loans include commercial and
industrial, real estate mortgage, consumer, agricultural and leasing services.
Other products and services include deposit and investment brokerage, credit
cards, credit-related insurance, automatic teller machines and safe deposit
boxes. Citizens Trust Company of Indiana, N.A., a subsidiary of The Citizens
National Bank of Evansville, provides trust, asset management and record-keeping
services for retirement plans. The Corporation continues to explore new products
and services to meet the needs and demands of its growing customer base and to
remain competitive with other financial institutions operating in its market
areas.
The Corporation also has three non-banking subsidiaries. Citizens
Information Systems, Inc., based in Evansville, Indiana, provides data
processing and information services to the Corporation and its subsidiaries and
other banks and businesses in Indiana, Kentucky, and Illinois. Citizens Life
Assurance Company underwrites credit life and disability insurance sold through
the Corporation's affiliates in Indiana and Illinois. Citizens Insurance of
Evansville sells property and casualty insurance.
Subsequent Acquisition
The Corporation continues to engage in analyses and investigations designed
to lead to the acquisition of other financial institutions and businesses
closely relating to banking.
On February 14, 1997, the Corporation issued 718,867 shares of its common
stock in exchange for all of the outstanding shares of BMC Bancshares, Inc.
(BMC), parent company for Bank of Mt. Carmel, Mt. Carmel, Illinois. At December
31, 1996, BMC had total assets and shareholders' equity of $100,042,000 and
$13,421,000, respectively. The acquisition was accounted for under the pooling
of interests method of accounting. The financial information contained herein
does not reflect the February 1997 merger.
Competition
The business of the Corporation and its subsidiaries is highly competitive.
There are numerous bank holding companies and groupings of banks located in
southern Illinois, southern, western, and central Indiana, Kentucky, and
Tennessee, which offer substantial competition in the acquisition and operation
of banks, savings associations and non-bank financial institutions. The banking
and finance subsidiaries and the Corporation's non-banking subsidiaries
encounter substantial competition in all of their banking and related activities
and expect such competition to intensify as the financial industry expands due
to more non-bank competitors offering financial services. In addition, recent
changes in laws relating to interstate banking have permitted some local
institutions to become part of larger regional and national organizations.
The Corporation's banking and finance subsidiaries compete with other
commercial banks, savings associations and credit unions for loans and deposits
and with money market funds for deposits.
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Consumer and commercial finance companies, mortgage banks, securities brokerage
companies, investment banking firms and insurance companies also compete with
the financial subsidiaries for various types of loans and financial services.
Some of these entities and institutions are not subject to the same regulatory
restrictions as financial institution holding companies and their subsidiary
banks and savings associations and therefore enjoy certain competitive
advantages. The principal methods of competition in banking activities are
price, service and convenience.
Regulations and Supervision
The United States banking industry is highly regulated, with federal and
state agencies having supervisory authority regarding the chartering,
supervision and examination of banks, savings banks and their bank holding
companies. There are numerous laws and regulations which limit how a bank
holding company and its subsidiaries conduct their businesses, including minimum
capital levels, limitations on the payment of dividends and regulation of
acquisitions and mergers.
As a bank holding company, the Corporation is subject to regulation under
the Bank Holding Company Act of 1956, as amended (the BHC Act), which is
administered by the Board of Governors of the Federal Reserve System (Federal
Reserve Board). The Corporation is required to file reports with the Federal
Reserve Board and various other federal and state agencies and to provide such
additional information as may be required.
A bank holding company must obtain Federal Reserve Board approval before
acquiring, directly or indirectly, ownership or control of any voting shares of
any bank or bank holding company if, after such acquisition, it would own or
control more than 5 percent of such shares (unless it already owns or controls a
majority of such shares). Federal Reserve Board approval must also be obtained
before any bank holding company acquires all or substantially all of the assets
of another bank or bank holding company or merges or consolidates with another
bank holding company.
The BHC Act also prohibits a bank holding company, with certain limited
exceptions, from acquiring or retaining direct or indirect ownership or control
of more than 5 percent of the voting shares of any company which is not a bank
or bank holding company, or from engaging in any activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
activities which the Federal Reserve Board has determined to be so closely
related to the business of banking or managing or controlling banks as to be a
proper incident thereto.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA)
was signed into law on September 30, 1996. EGRPRA streamlined the non-banking
activities application process for well-capitalized and well-managed bank
holding companies. Under EGRPRA, qualified bank holding companies may commence a
regulatorily approved non-banking activity without prior notice to the Federal
Reserve Board; written notice is required within 10 days after commencing the
activity. Under EGRPRA, the prior notice period is reduced to 12 days in the
event of any non-banking acquisition or share purchase, assuming the size of the
acquisition does not exceed 10% of risk-weighted assets of the acquiring bank
holding company and the consideration does not exceed 15% of Tier 1 capital. The
Federal Reserve Board has recently announced comprehensive amendments to its
regulations under the BHC Act that implement the foregoing provisions of the
EGRPRA and that also streamline the application/notice
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process for acquisitions of banks and bank holding companies and eliminate
regulatory provisions that the Federal Reserve Board considered unnecessary.
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (Interstate Act) was signed into law, authorizing, among
other things, interstate acquisitions by bank holding companies, interstate
mergers of banks and "agency banking" with affiliates in different states. The
Interstate Act amended the BHC Act to allow an adequately capitalized and
managed bank holding company to acquire banks located in any state, beginning
September 29, 1995, subject to state deposit caps and a 10 percent nationwide
deposit cap. Adequately capitalized banks will be permitted to merge across
state lines without regard to whether the merger is prohibited by the laws of
any state beginning June 1, 1997. States may "opt out" of this provision prior
to the effective date, and alternatively, states may "opt in" earlier than June
1, 1997. Of the states in which the bank subsidiaries of the Corporation
operate, Indiana, Illinois and Kentucky have each enacted legislation that
permits interstate branching by merger, although only Indiana has authorized
such branching prior to June 1, 1997. The Interstate Act's "agency banking"
provisions, effective September 29, 1995, permit affiliated banks to act as
agent for each other in the conduct of most core banking activities. Affiliated
banks may receive deposits, renew time deposits, close loans, service loans and
receive payments on loans and other obligations on behalf of each other, without
being treated as branches.
Subsidiary banks of a bank holding company are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit or the
lease or sale of any property or the furnishing of services. Bank holding
companies and their nonbank subsidiaries that engage in electronic benefit
transfer services are also subject to certain anti-tying restrictions.
Subsidiary banks of a bank holding company are also subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, or investments in stock or
other securities thereof, and on the taking of such stock or other securities as
collateral for loans.
The Federal Reserve Board has prescribed capital adequacy guidelines for
use in its examination and regulation of bank holding companies. If the capital
of a bank holding company falls below the minimum levels established by these
guidelines, it may be denied approval to acquire or establish additional banks
or non-bank businesses. The guidelines established by the Federal Reserve Board
set a minimum leverage ratio of 3.0 percent for the most highly rated bank
holding companies that do not anticipate significant growth. All other
institutions are required to maintain a ratio of 4.0 to 5.0 percent depending on
their particular circumstances and risk profile. This ratio is defined as
shareholders' equity less non-qualifying intangible assets, as a percentage of
the sum of quarter to date total average assets less non-qualifying intangible
assets. The Federal Reserve Board has also adopted risk-based capital guidelines
which assign various risk weightings to assets and off-balance sheet items and
set minimum capital requirements. Under the current rules, banks are required to
have core capital (Tier 1) of at least 4.0 percent of risk-weighted assets and
total capital of 8.0 percent of risk-weighted assets. Tier 1 capital consists
primarily of shareholders' equity less intangible assets; and total capital
consists of Tier 1 capital, certain long-term debt and convertible debentures
and a portion of the allowance for loan losses. At December 31, 1996, the
Corporation's leverage, Tier 1 and total capital ratios were 7.2 percent, 11.6
percent, and 13.1 percent, respectively, all well above regulatory minimums.
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The Federal Reserve Board has issued a policy statement on the payment of
cash dividends by bank holding companies. In the statement, the Federal Reserve
Board expressed its view that a holding company experiencing earnings weaknesses
should not pay cash dividends exceeding its net income nor pay a dividend which
can only be funded in a way that weakens the holding company's financial health,
such as by borrowing. The Federal Reserve Board periodically examines bank
holding companies and possesses cease and desist powers over bank holding
companies and their non-bank subsidiaries if their actions represent unsafe or
unsound practices.
Per the "cross guarantee" provisions of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, each financial subsidiary of the
Corporation could be liable for any loss incurred by the FDIC in connection with
the failure of any other financial subsidiary of the Corporation.
Each of the financial subsidiaries is subject to supervision and regulation
by its chartering authority. The primary supervisory authorities of the
Corporation's bank subsidiaries are the Comptroller of the Currency (national
banks) and appropriate state banking regulatory authorities (state banks). Each
regulator regularly examines such areas as reserves, loans, investments,
management practices and other aspects of bank operations, and has the authority
to prevent a bank from engaging in an unsafe or an unsound practice in
conducting its business. In addition, the Corporation's subsidiary banks are
members of, and subject to regulation by, the Federal Deposit Insurance
Corporation (FDIC).
Federal and state banking laws and regulations govern, among other things,
the scope of a bank's business, the investments it may make, the reserves
against deposits it must maintain, loans a bank makes and collateral it takes,
minimum capital levels, activities with respect to mergers and consolidations,
and the establishment of branches.
In December 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA) was enacted. FDICIA contains various provisions relating to the
supervision, regulation, and operation of banks and bank holding companies.
Various regulations implementing FDICIA have been promulgated by bank
regulators. FDICIA, among other things, identifies the following capital
standards for depository institutions: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. A depository institution is well capitalized if it
significantly exceeds the minimum level required by regulation for each relevant
capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below any such measure, and critically
undercapitalized if it fails to meet any critical capital level set forth in the
regulations. FDICIA requires a bank that is determined to be undercapitalized to
submit a capital restoration plan, and the bank's holding company must guarantee
that the bank will meet its capital plan, subject to certain limitations. FDICIA
also prohibits banks from making any capital distribution or paying any
management fee if the bank would thereafter be undercapitalized. Under these
rules, institutions must have a leverage ratio of 5.0 percent or above, Tier 1
capital to risk-based assets of 6.0 percent or above, and total capital to risk-
based assets of 10.0 percent or above in order to qualify as well capitalized.
All of the Corporation's banking subsidiaries were well-capitalized for purposes
of FDICIA and exceeded all other regulatory capital requirements at year-end
1996.
FDICIA grants the FDIC authority to impose special assessments on insured
depository institutions to repay FDIC borrowings from the United States Treasury
or other sources and to establish
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semiannual assessment rates on Bank Insurance Fund (BIF) and Savings Association
Insurance Fund (SAIF) member banks so as to maintain the funds at the designated
reserve ratios defined in FDICIA. FDICIA also required the FDIC to implement a
risk-based insurance assessment system pursuant to which the premiums paid by a
depository institution are based on the probability that the BIF or SAIF will
incur a loss in respect of such institution. Each of the Corporation's financial
subsidiaries was in the category of institutions that paid deposit assessments
at the lowest rates.
Because of concerns relating to competitiveness and the safety and
soundness of the banking industry, Congress is considering a number of wide-
ranging proposals for altering the structure, regulation and competitive
relationships of the nation's financial institutions. Among such bills are new
proposals to merge the BIF and the SAIF insurance funds, to eliminate the
federal thrift charter, to alter the statutory separation of commercial and
investment banking and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or the extent to which the business
of the Corporation may be affected thereby.
Government Policies
The policies of federal and state agencies including the Federal Reserve
Board, the FDIC and other regulatory authorities may have a significant effect
on the operating results of the Corporation and the banking industry. An
important function of the Federal Reserve Board is to regulate aggregate money
supply and credit conditions and interest rates in order to influence general
economic conditions. The Federal Reserve Board, primarily through open market
operations of U.S. Government securities, and by varying the discount rate for
member bank borrowings and changing reserve requirements against member bank
deposits, can exercise significant influence on the overall growth and
distribution of bank loans and deposits and interest rates charged on loans and
earned on investments or paid for time and savings deposits. The general effect,
if any, of such policies upon the future business and earnings of the
Corporation and its financial subsidiaries cannot be determined.
Forward Looking Statements
Statements contained in this Report and in future filings by the
Corporation with the Securities and Exchange Commission, in the Corporation's
press releases and in oral statements made with the approval of an authorized
executive officer, which are not historical or current facts are "forward-
looking statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended). There can be no assurance that such forward-looking statements will in
fact transpire. The following important factors, risks and uncertainties, among
others, could cause actual results to differ materially from such forward-
looking statements:
Credit risk: Although the Corporation has had good credit quality in recent
years, changes in economic conditions could adversely affect the credit
quality of the loan portfolio.
Interest rate risk: Although the Corporation actively manages its interest
rate sensitivity, such management is not an exact science. Rapid increases
or decreases in interest rates could adversely impact the Corporation's net
interest margin if changes in its cost of funds do not correspond to the
changes in income yields.
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Competition: The Corporation's activities in its local markets involve
competition with other banks as well as other financial institutions and
enterprises. Also, the financial service markets have and likely will
continue to experience substantial changes, which could significantly
change the Corporation's competitive environment in the future.
Legislative and regulatory environment: The Corporation operates in a
rapidly changing legislative and regulatory environment. It cannot be
predicted how or to what extent future developments in these areas will
affect the Corporation. These developments could negatively impact the
Corporation through increased operating expenses for compliance with new
laws and regulations, restricted access to new products and markets, or in
other ways.
General business and economic trends: These factors, including the impact
of inflation levels, influence the Corporation's results in numerous ways,
including operating expense levels, deposit and loan activity, and
availability of trained individuals needed for future growth.
The foregoing list should not be construed as exhaustive and the
Corporation disclaims any obligation to subsequently update or revise any
forward-looking statements after the date of this Report.
Executive Officers of the Registrant
The following table sets forth the names and ages of all executive officers
of the Corporation, including all positions and offices with the Corporation
held by each such person, the term of office and the period during which he has
served as such.
<TABLE>
<CAPTION>
Name Age Office and Business Experience
<S> <C> <C>
H. Lee Cooper 58 Chairman of the Board of the Corporation
since 1986. Previously, Mr. Cooper also
served as Chief Executive Officer and
President of the Corporation and in various
capacities as a senior executive officer of
both the Corporation and Citizens.
James J. Giancola 48 President and Chief Executive Officer of the
Corporation. Mr. Giancola has been President
since 1994 and was named Chief Executive
Officer in March 1996. Prior to joining the
Corporation in 1992, Mr. Giancola was
President of Gainer Bank of Merrillville,
Indiana.
M. Lynn Cooper 46 Executive Vice President of the Corporation
since 1994. Prior to 1994, Mr. Cooper served
as Chairman of the Board, President and Chief
Executive Officer of Citizens Bank of
Kentucky, a subsidiary of the Corporation.
Marvin Huff, Jr. 63 Executive Vice President of the Corporation
since March 1996 and President of Citizens
Information Systems, Inc., a subsidiary of
the Corporation, since 1994. Previously, Mr.
Huff served in various capacities as an
officer of Citizens.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
David L. Knapp 57 Executive Vice President of the Corporation
since 1986. Mr. Knapp was named President
and Chief Executive Officer of Citizens in
1994. Previously, Mr. Knapp served as Chief
Financial Officer of the Corporation and
Citizens and in various other capacities as a
senior executive officer of both the
Corporation and Citizens.
John R. Spruill 54 Executive Vice President and Chief Financial
Officer of the Corporation since 1995. Prior
to 1995, Mr. Spruill served as Executive Vice
President and Chief Financial Officer of
Southern National Corporation in North
Carolina.
David M. Viar 47 Executive Vice President of the Corporation
since March 1996. Previously, Mr. Viar
served as Senior Vice President and Treasury
Officer of the Corporation. Prior to joining
the Corporation in 1993, Mr. Viar was Senior
Vice President--Funds Management of Dominion
Bancshares in Virginia.
Ralph L. Alley 45 Senior Vice President, Controller and
Treasurer of the Corporation and Senior Vice
President and Controller of Citizens since
1985. Previously, Mr. Alley served in
various capacities as an officer of Citizens.
Jerry W. Cecil 62 Senior Vice President and Chief Credit
Officer of the Corporation since 1988, and
Senior Vice President of Citizens since 1983.
Mr. Cecil retired from the Corporation on
February 28, 1997.
John N. Daniel 51 Senior Vice President and Chief Credit
Officer since February 1997. Previously, Mr.
Daniel served as Senior Vice President,
Commercial Lending of Citizens.
James R. Dodd 51 Senior Vice President of the Corporation
since 1993. In 1996, Mr. Dodd was named
President of Citizens Trust Co., a subsidiary
of Citizens. Prior to joining the
Corporation in 1993, he was President of
BancOklahoma Trust Company.
Douglas R. Hanks 50 Senior Vice President and Director of
Marketing of the Corporation since 1994.
Prior to joining the Corporation in 1994, Mr.
Hanks served as Vice President--Director of
Field Marketing for BancOne Corporation.
John M. Oberhelman 55 Senior Vice President of Human Resources for
the Corporation since 1992 and Senior Vice
President and Human Resources Director of
Citizens. Previously, Mr. Oberhelman served
in various capacities as an officer of
Citizens.
</TABLE>
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There are no family relationships between any of the named persons. Each
executive officer is elected by the Corporation's Board of Directors to serve
until the close of the next annual meeting of the shareholders following his
election and until the election of his successor. No executive officer of the
Corporation was selected to his position pursuant to any arrangement or
understanding with any other person.
Statistical Disclosure
The statistical disclosures of the Corporation on a consolidated basis,
included on pages 21 to 37 of the Corporation's Annual Report to Shareholders
for the year ended December 31, 1996, are hereby incorporated by reference
herein.
ITEM 2. PROPERTIES
Citizens owns a modern, 15-story office building which houses the
Corporation's principal offices and the main banking offices of Citizens. The
building is located at 20 Northwest Third Street, Evansville, Indiana, and is in
excellent condition. The Corporation and Citizens presently occupy approximately
three-fourths of the building and the remainder is leased to various tenants.
The Corporation and Citizens also utilize five other buildings in close
proximity to the main banking office in downtown Evansville which are also owned
and are available for future office needs of the Corporation. A portion of this
space is also currently being leased by various tenants. The financial
subsidiaries own 74 of the 126 remaining offices in which they conduct their
businesses. Additionally, three other properties are utilized as office space by
the Corporation's subsidiaries. The net investment, as of December 31, 1996, of
the Corporation and its subsidiaries in property and equipment was $70,448,000.
Three properties are security for real estate mortgages payable which balances
totaled $2,834,000 at December 31, 1996. None of the other properties are
subject to material liens or other encumbrances.
Management of the Corporation believes that, as a group, the facilities are
in satisfactory condition and repair and will be adequate to meet its
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Corporation presently is engaged in routine litigation incidental to
its business and management does not believe such litigation will materially
adversely affect the Corporation's consolidated financial position or
operations.
ITEM 4. SUBMISSION MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS
<PAGE>
Pages 1 and 63 of the Corporation's Annual Report to Shareholders for the
year ended December 31, 1996, are hereby incorporated by reference herein.
ITEM 6. SELECTED FINANCIAL DATA
Page 20 of the Corporation's Annual Report to Shareholders for the year
ended December 31, 1996, is hereby incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Pages 21 to 36 of the Corporation's Annual Report to Shareholders for the
year ended December 31, 1996, are hereby incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 28 and 38 to 60 of the Corporation's Annual Report to Shareholders
for the year ended December 31, 1996, are hereby incorporated by reference
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The "Letter re Change in Certifying Accountant" required by Item
601(b)(16) was previously filed as an exhibit to the Corporation's Current
Report on Form 8-K filed September 11, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the headings "Information Regarding Nominees for
Class III Directors" and "Information Regarding Directors Continuing in Office"
on pages 4 and 5 of the Corporation's Proxy Statement for its Annual Meeting of
Shareholders to be held April 22, 1997, is hereby incorporated by reference
herein. The information on Executive Officers is included in Part I, Item 1 of
this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Executive Compensation" on pages 7 to
13 of the Corporation's Proxy Statement for its Annual Meeting Shareholders to
be held April 22, 1997, is hereby incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding beneficial ownership of the Common Stock of the
Corporation set forth under the headings "Certain Beneficial Ownership,"
"Information Regarding Nominees for Class III Directors," "Information Regarding
Directors Continuing in Office" and "Security Ownership of
<PAGE>
Management," on pages 3 through 6 of the Corporation's Proxy Statement for its
Annual Meeting of Shareholders to be held April 22, 1997, is hereby incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Transactions with Directors, Officers
and Associates" on page 14 of the Corporation's Proxy Statement for its Annual
Meeting of Shareholders to be held April 22, 1997, is hereby incorporated by
reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) The following consolidated financial statements of the Corporation,
included on pages 38 through 60 of the Corporation's Annual Report to
Shareholders for the year ended December 31, 1996, are hereby
incorporated by reference herein:
. Consolidated Balance Sheets at December 31, 1996 and 1995.
. Consolidated Statements of Income, years ended December 31, 1996,
1995, and 1994.
. Consolidated Statements of Changes in Shareholders' Equity, years
ended December 31, 1996, 1995 and 1994.
. Consolidated Statements of Cash Flows, years ended December 31, 1996,
1995 and 1994.
. Notes to Consolidated Financial Statements.
. Independent Auditors' Report.
(2) All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or related notes.
(b) Reports on Form 8-K
None.
(c) Exhibits
(1) Exhibits required to be filed by Item 601(a) of Regulation S-K are
included as exhibits to, or incorporated by reference in, this Report
as follows:
3(i) - Articles of Incorporation of the Corporation, filed as Exhibit
3(i) to the Corporation's 1994 Annual Report on Form 10-K, is
incorporated herein by reference.
3(ii)- Bylaws of the Corporation, filed as Exhibit 3(ii) to the
Corporation's 1995 Annual Report on Form 10-K, is incorporated
herein by reference.
<PAGE>
4 - No long-term debt instrument issued by the Corporation exceeds
10% of the consolidated total assets of the Corporation and its
subsidiaries. In accordance with paragraph 4 (iii) of Item 601(b)
of Regulation S-K, the Corporation will furnish to the Securities
and Exchange Commission upon request copies of long-term debt
instruments and related agreements.
10* - (1) The following Executive Compensation Plans and Arrangements,
filed as Exhibits 10(1)(c) and (d) to the Corporation's 1992
Annual Report on Form 10-K, are incorporated herein by
reference:
(a) CNB Bancshares, Inc. 1992 Incentive Stock Option Plan;
and
(b) Citizens Incentive Savings Plan.
(2) The following Management Contracts, filed as Exhibits
10(2)(a),10(2)(c) and 10(2)(d) and to the Corporation's 1992
Annual Report on Form 10-K, are incorporated herein by
reference:
(a) Change of control agreement between the Corporation and
H. Lee Cooper dated December 20, 1988;
(b) Change of control agreement between the Corporation and
James J. Giancola dated June 6, 1992; and
(c) Change of control agreement between the Corporation and
David L. Knapp dated December 20, 1988.
(3) The following Management Contract and Executive Compensation
Plans, filed as exhibits 10(3)(a) through (c) to the
Corporation's 1994 Annual Report on Form 10-K, are
incorporated herein by reference.
(a) Change of control agreement between the Corporation and
M. Lynn Cooper dated May 19, 1992.
(b) CNB Bancshares, Inc. Savings Equalization Plan, dated
May 1, 1994.
(c) CNB Bancshares, Inc. Pension Equalization Plan, dated
May 1, 1994.
(4) The CNB Bancshares Inc. 1995 Incentive Stock Option Plan is
incorporated herein by reference to the Corporation's filing
with the Securities and Exchange Commission as an exhibit to
a Registration Statement on Form S-8, Registration No. 33-
60431.
(5) The following Management Contracts, filed as Exhibits
10(5)(a) through (d) to the Corporation's 1995 Annual Report
on Form 10-K, are incorporated herein by reference:
(a) Change of control agreement between the Corporation and
James R. Dodd dated December 10, 1993;
(b) Change of control agreement between the Corporation and
Marvin Huff, Jr. dated December 20, 1988;
(c) Change of control agreement between the Corporation and
David M. Viar dated October 18, 1993; and
(d) Change of control agreement between the Corporation and
John R. Spruill dated October 3, 1995.
<PAGE>
13 - Portions of the Annual Report to Shareholders for the year
ended December 31, 1996
21 - Subsidiaries of the Corporation.
23(a) - Consent of KPMG Peat Marwick LLP
23(b) - Consent of Geo. S. Olive & Co. LLC
27 - Financial Data Schedule
99 - Independent Auditors' Report for the Years Ended December 31,
1995 and 1994.
(2) The following exhibit will be submitted at a later date:
The annual financial statements and independent auditors' report
thereon for Citizens Incentive Savings Plan for the year ended
December 31, 1996, will be filed as an amendment to the 1996 Annual
Report on Form 10-K no later than June 29, 1997.
* The documents identified herein as 10-(1)(a) and 10-(1)(b), 10-(2)(a) through
10-(2)(c), 10-(3)(a) through 10-(3)(c), 10-(4) and 10-(5)(a) through 10-(5)(d)
constitute all management contracts and compensatory plans and arrangements
required to be filed as an exhibit to this Form, pursuant to Item 14(c) of this
Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 18th day of
March, 1997.
CNB BANCSHARES, INC.
By /s/ James J. Giancola
------------------------------
James J. Giancola, President and Chief Executive Officer
(chief executive officer)
By /s/ John R. Spruill
------------------------------
John R. Spruill, Executive Vice President and
Chief Financial Officer
(principal financial officer)
By /s/ Ralph L. Alley
------------------------------
Ralph L. Alley, Senior Vice President, Controller
and Treasurer
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ H. Lee Cooper Director March 18, 1997
- --------------------------
H. Lee Cooper
/s/ John D. Engelbrecht Director March 18, 1997
- --------------------------
John D. Engelbrecht
/s/ James J. Giancola Director March 18, 1997
- --------------------------
James J. Giancola
/s/ Robert L. Koch, II Director March 18, 1997
- --------------------------
Robert L. Koch, II
/s/ Larry J. Kremer Director March 18, 1997
- --------------------------
Larry J. Kremer
/s/ Jerry A. Lamb Director March 18, 1997
- --------------------------
Jerry A. Lamb
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Burkley F. McCarthy Director March 18, 1997
- --------------------------
Burkley F. McCarthy
/s/ Robert K. Ruxer Director March 18, 1997
- --------------------------
Robert K. Ruxer
/s/ Thomas W. Traylor Director March 18, 1997
- --------------------------
Thomas W. Traylor
/s/ Paul G. Wade Director March 18, 1997
- --------------------------
Paul G. Wade
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Reg. S-K
Exhibit No. Description of Exhibit Page
----------- ---------------------- ----
<S> <C> <C>
3 (i) Articles of Incorporation of the Corporation filed as Exhibit 3(i) to the Corporation's
1994 Annual Report on Form 10-K is incorporated herein by reference.
3 (ii) Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation's 1995 Annual Report
on Form 10-K, is incorporated herein by reference.
10*-(1) The following Executive Compensation Plans and Arrangements, filed as Exhibits 10(1)(c) and (d)
to the Corporation's 1992 Annual Report on Form 10-K, are incorporated herein by reference:
(a) CNB Bancshares, Inc. 1992 Incentive Stock Option Plan.
(b) Citizens Incentive Savings Plan.
10 (2) The following Management Contracts, filed as Exhibits 10(2)(a), 10(2)(c) and 10(2)(d) to the
Corporation's 1992 Annual Report on Form 10-K, are incorporated herein by reference:
(a) Change of control agreement between the Corporation and H. Lee Cooper dated December
20, 1988.
(b) Change of control agreement between the Corporation and James J. Giancola dated June 6,
1992.
(c) Change of control agreement between the Corporation and David L. Knapp dated December
20, 1988.
10 (3) The following Management Contract and Executive Compensation Plans filed as Exhibits 10(3)(a)
through (c) to the Corporation's 1994 Annual Report on Form 10-K are incorporated herein by
reference:
(a) Change of control agreement between the Corporation and M. Lynn Cooper dated May 19,
1992.
(b) CNB Bancshares, Inc. Savings Equalization Plan dated May 1, 1994.
(c) CNB Bancshares, Inc. Pension Equalization Plan dated May 1, 1994.
10 (4) The CNB Bancshares, Inc. 1995 Incentive Stock Option Plan is incorporated by reference to the
Corporation's filing with the Securities and Exchange Commission as an exhibit to a Registration
Statement on Form S-8, Registration No. 33-60431.
10 (5) The following Management Contracts, filed as Exhibits 10(5)(a) through (d) to the Corporations
1995 Annual Report on Form 10-K, are incorporated herein by reference:
(a) Change of control agreement between the Corporation and James R. Dodd dated December 10, 1993.
(b) Change of control agreement between the Corporation and Marvin Huff, Jr. dated December 20, 1988.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(c) Change of control agreement between the Corporation and David M. Viar dated October 18,
1993.
(d) Change of control agreement between the Corporation and John R. Spruill dated October
3, 1995.
13 Portions of the Annual Report to Shareholders for the Year Ended December 31, 1996 .................
21 Subsidiaries of the Corporation.....................................................................
23(a) Consent of KPMG Peat Marwick LLP ...................................................................
23(b) Consent of Geo. S. Olive & Co. LLC .................................................................
27 Financial Data Schedule.............................................................................
99 Independent Auditors' Report for the Years ended December 31, 1995 and 1994..........................
</TABLE>
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
1996
1996 Excluding SAIF 1995 Change
<S> <C> <C> <C> <C>
Per Share- Net income $ 1.96 $ 2.12 $ 1.86 14.0%
Cash dividends paid (1) .82 .74 10.8
Book value at year-end 16.29 15.84 2.8
Closing market price 41.75 27.14 53.8
Earnings (in thousands)
Net interest income $ 145,601 $ 133,435 9.1%
Provision for loan losses 9,206 6,939 32.7
Non-interest income 55,525 46,661 19.0
SAIF assessment 4,963
Other non-interest expense 129,740 116,796 11.1
Net income 37,694 $40,739 35,651 14.3
Average Balances (in thousands)
Total assets $3,832,735 $3,529,507 8.6%
Earning assets 3,601,780 3,308,300 8.9
Loans, net of unearned interest 2,079,674 2,139,427 (2.8)
Deposits 2,858,132 2,683,087 6.5
Interest bearing liabilities 3,184,405 2,916,963 9.2
Shareholders' equity 303,446 285,894 6.1
Financial Ratios
Return on assets .98% 1.06% 1.01%
Return on shareholders' equity 12.42 13.43 12.47
Net interest margin 4.17 4.13
Efficiency ratio (2) 63 64
Allowance for loan losses to loans 1.37 1.46
Net charge-offs to average loans .46 .35
Equity to assets at year-end 7.58 8.20
Tangible equity to assets at year-end 6.96 7.60
Risk-based capital ratios at year-end
Tier I capital 11.63 12.21
Total capital 13.11 13.86
Other Data (3)
Average common and equivalent shares outstanding 19,225,755 19,122,856
Common shareholders of record 9,508 8,423
Full-time equivalent associates 1,911 1,817
Banking offices 93 91
Consumer finance offices 34 29
</TABLE>
Notes: (1) Dividends per share is for CNB Bancshares only, not restated for
poolings of interests.
(2) Efficiency ratio excludes foreclosed property expenses, securities
gains/losses and other non-recurring items, as originally reported,
not restated for poolings of interests.
(3) Other data is as of year-end, except for average shares.
<PAGE>
Selected Statistical Information
(Dollars in thousands, except for share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Earnings
Net interest income $ 145,601 $ 133,435 $ 121,273 $ 111,394 $ 105,233
Provision for loan losses 9,206 6,939 7,234 3,890 9,191
Non-interest income 55,525 46,661 46,805 43,113 37,809
SAIF assessment 4,963
Other non-interest expense 129,740 116,796 113,539 103,662 96,457
Income taxes 19,523 20,710 16,793 16,039 11,273
Income before change in accounting 37,694 35,651 30,512 30,916 26,121
Change in accounting for income taxes 1,868
Net income 37,694 35,651 30,512 32,784 26,121
Per Share Data
Net income (1) $ 1.96 $ 1.86 $ 1.60 $ 1.66 $ 1.42
Income, excluding SAIF assessment 2.12
Cash dividends declared (2) (3) .82 .56 .71 .67 .65
Cash dividends paid .82 .74 .70 .65 .62
Book value at year-end 16.29 15.84 14.44 14.74 13.17
Closing market price 41.75 27.14 26.87 25.97 21.79
At Year-End
Total assets $4,117,989 $3,628,682 $3,461,339 $3,145,264 $2,918,357
Earning assets 3,850,008 3,372,717 3,226,142 2,914,302 2,683,226
Loans, net of unearned interest (4) 2,219,651 1,971,454 2,118,126 1,841,457 1,596,427
Allowance for loan losses 30,312 28,806 28,502 23,443 22,335
Non-interest bearing deposits 354,529 322,706 307,809 280,544 252,221
Total deposits 3,030,227 2,789,989 2,595,456 2,590,790 2,454,234
Shareholders' equity 312,298 297,693 273,828 271,778 238,759
Average Balances
Total assets $3,832,735 $3,529,507 $3,278,950 $3,036,961 $2,908,545
Earning assets 3,601,780 3,308,300 3,055,115 2,814,727 2,692,932
Loans, net of unearned interest (4) 2,079,674 2,139,427 1,950,233 1,717,139 1,670,135
Non-interest bearing deposits 309,439 293,051 287,963 264,788 236,515
Total deposits 2,858,132 2,683,087 2,614,802 2,530,831 2,438,924
Shareholders' equity 303,446 285,894 277,146 251,276 225,612
Common and equivalent shares outstanding 19,225,755 19,122,856 19,042,818 18,599,772 18,358,736
Financial Ratios (1)
Return on assets .98% 1.01% .93% 1.02% .90%
Return on assets, excluding SAIF assessment 1.06
Return on shareholders' equity 12.42 12.47 11.01 12.30 11.58
Return on shareholders' equity, excluding SAIF assessment 13.43
Net interest margin 4.17 4.13 4.07 4.08 4.05
Efficiency ratio (5) 63 64 66 67 65
Equity to assets at year-end 7.58 8.20 7.91 8.64 8.18
Cash dividend payout (3) 42 29 40 36 36
</TABLE>
(1) Per share income and financial ratios are based on income before the
accounting change in 1993.
(2) Dividends per share is for CNB Bancshares, Inc. only, not restated for
pooling transactions.
(3) Declaration date for fourth quarter 1995 dividend was changed from December
1995 to January 1996.
(4) Excludes loans held for sale.
(5) Excludes foreclosed property expenses, securities gains/losses and other
non-recurring items, as originally reported, not restated for poolings of
interests.
<PAGE>
Management's Discussion and Analysis
This section presents management's review of the operating results and financial
condition of CNB Bancshares, Inc. (the Corporation) and its subsidiaries. It
provides information which is not otherwise apparent from the consolidated
financial statements and related footnotes and is intended to assist readers in
evaluating the Corporation's performance. The following analysis should be read
in conjunction with the consolidated financial statements and accompanying
notes, as well as the average balance sheet and selected statistical information
presented in other sections of the report. All dollar amounts throughout this
discussion and report are presented in thousands, except for per share data, and
all share data has been adjusted for common stock dividends.
The Corporation's financial data for periods prior to mergers accounted for
as poolings of interests, and having a material impact on the Corporation's
financial results, has been restated.
Results of Operations
Net income for the twelve months ended December 31, 1996, was $37,694, an
increase of 5.7 percent over the $35,651 earned in 1995. Net income per share of
$1.96 in 1996 represented an increase of 5.4 percent over 1995. On September 30,
1996, legislation was enacted imposing a one-time, special assessment on
deposits insured by the Savings Association Insurance Fund (SAIF) which
decreased the future assessment rate on these deposits. As a result, the
Corporation recorded a $5.0 million charge, or $3.0 million after income taxes.
Excluding the charge for the SAIF assessment, net income was $40,739, or $2.12
per share, for 1996. The improved 1996 operating performance was primarily due
to increased net interest income. Growth in earning assets, particularly
mortgage-backed securities and loans, and an improved net interest margin
resulted in increased net interest income on a fully taxable equivalent basis of
$13,471 from 1995. Non-interest income increased $8,864 due in large part to
gains of $4.9 million resulting from first and third quarter loan
securitizations. Non-interest expenses increased $17,907 during 1996 as the
Corporation recorded the $5.0 million SAIF recapitalization charge and $4.5
million of expenses related to closed offices, obsolete equipment, continued
centralization of back-office functions and other one-time expenses. Operating
expenses as a percentage of revenues, commonly referred to as the efficiency
ratio, improved from 64 percent in 1995 to 63 percent in 1996. The provision for
loan losses increased in 1996 by $2,267 from 1995 due to loan growth and
increased net charge-offs, particularly in the consumer loan portfolio.
Net income increased 16.8 percent in 1995 from the $30,512 earned in 1994
primarily due to increased net interest income. Growth in earning assets,
particularly loans, and an improved net interest margin resulted in increased
net interest income on a fully taxable equivalent basis of $12,250 from 1994.
Net income per share increased to $1.86 from the $1.60 recorded in 1994, a 16.3%
improvement.
The following table reconciles the changes in net income per share from 1994
to 1996 by major income statement components which are further discussed below.
Changes in Net Income Per Share
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income per share, previous year $1.86 $1.60
Increase (decrease) attributable to:
Taxable equivalent net interest income .70 .64
Provision for loan losses (.12) .02
Non-interest income .46 (.01)
Non-interest expense (.67) (.17)
Income tax effect (.10) (.21)
Increase in common and common equivalent
shares outstanding (.01) (.01)
Income per share before SAIF assessment 2.12 1.86
SAIF assessment, net of tax (.16)
Net income per share, current year $1.96 $1.86
</TABLE>
The Corporation's earnings in 1996 resulted in returns on average assets and
shareholders' equity of .98 percent and 12.42 percent, respectively, compared
with a return on assets of 1.01 percent and a return on equity of 12.47 percent
in 1995. Excluding the $3.0 million after tax SAIF recapitalization charge,
returns on average assets and shareholders' equity were 1.06 percent and 13.43
percent, respectively.
<PAGE>
Net Interest Income
Net interest income is the Corporation's largest component of income and
represents the difference between interest and fees earned on loans and
investments and the interest paid on interest bearing liabilities. In this
discussion, net interest income is presented on a fully taxable equivalent basis
(FTE) whereby tax exempt income, such as interest on securities of state and
political subdivisions, has been increased to an amount that would have been
earned had it been taxable. This adjustment places taxable and nontaxable income
on a common basis and permits comparisons of rates and yields. A complete
analysis of net interest income, with average balances and related interest
rates for the past three years, appears on page 37 of this report.
In 1996, net interest income increased $13,471, or 9.9 percent, to $150,181,
compared to $136,710 in 1995, due to an increased level of earning assets and an
improved net interest margin. Net interest income in 1995 increased by $12,250
or 9.8 percent over the $124,460 recorded in 1994. The amount of net interest
income is affected by changes in the volume and mix of earning assets and
interest bearing deposits and liabilities, and the interest rates on these
assets and liabilities. An analysis of how changes in volumes and rates have
affected net interest income for the years ended December 31, 1996, and 1995 is
presented below.
Analysis of Changes in Net Interest Income*
<TABLE>
<CAPTION>
1996 over 1995 1995 over 1994
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold and other short-term
money market investments $ (399) $ (59) $ (458) $ (970) $ 583 $ (387)
Real estate loans held for sale 2,852 (90) 2,762 (828) 125 (703)
Investment securities 22,139 2,095 24,234 6,174 8,368 14,542
Loans (5,509) 2,933 (2,576) 15,911 17,460 33,371
Total interest income 19,083 4,879 23,962 20,287 26,536 46,823
Interest Expense:
Interest bearing checking accounts 197 (1,239) (1,042) (637) 298 (339)
Money market savings accounts 1,488 333 1,821 (400) 2,810 2,410
Other savings accounts (365) (345) (710) (1,045) 105 (940)
Certificates of deposit and other time 6,954 805 7,759 6,660 13,837 20,497
Short-term borrowings 6,814 (1,909) 4,905 3,789 3,259 7,048
FHLB advances and other long-term debt (916) (1,326) (2,242) 5,473 424 5,897
Total interest expense 14,172 (3,681) 10,491 13,840 20,733 34,573
Changes in net interest income $ 4,911 $ 8,560 $13,471 $ 6,447 $ 5,803 $12,250
</TABLE>
*Fully taxable equivalent
Note: The change in interest which cannot be attributed to only a change in
rate or a change in volume, but instead represents a combination of the two
factors, has been allocated to the rate variance.
Average earning assets, which includes loans, investment securities and other
assets that earn interest, increased by $293,480 during 1996 to $3,601,780 while
interest bearing liabilities increased by only $267,442. Consequently, a greater
portion of the Corporation's earning assets was funded in 1996 by non-interest
bearing sources such as demand deposits, which contributed to the increased net
interest income and an improved net interest margin. Additionally, average
earning assets increased to 94.0 percent of total average assets in 1996,
compared to 93.7 in 1995. Average earning assets were $3,308,300 and interest
bearing liabilities were $2,916,963 in 1995, increases of $253,185 and $228,882,
respectively, from 1994. As the preceding analysis indicates, this increased
volume resulted in $4,911 and $6,447 of additional net interest income in 1996
and 1995, respectively, over the previous years'.
The net interest margin is a percentage computed by dividing net interest
income (on a fully taxable equivalent basis) by average earning assets and
represents a basic measure of interest earned on interest bearing assets held by
the Corporation, less the interest expense to fund such assets. The net interest
margin increased by 4 basis points to 4.17 percent in 1996 from 4.13 percent in
1995, which increased by 6 basis points from 1994. As the prime rate and other
short-term interest rates fell in 1995 and 1996, the rates paid on interest
bearing liabilities repriced downward to a greater extent than did rates earned
on loans, investment securities and other earning assets. Interest income as a
percentage of average earning assets decreased by 1 basis point from 1995 to
8.36 percent. Loan securitizations and implementation of a corporate-owned life
insurance program negatively impacted the margin by 4 basis points in 1996. Both
transactions resulted in a shift of certain revenues from interest income to
non-interest income. Interest expense as a percentage of average earning assets
decreased by 5 basis points to 4.19 percent. To reduce the impact of changing
interest rates on its costs to acquire liabilities that fund certain earning
assets, the Corporation has entered into interest rate contracts. Since 1994,
the purchase of certain mortgage-backed investment securities were funded with
repurchase agreements, the interest cost of which was hedged by the purchase of
interest rate caps. Amortization of premiums paid for interest rate caps totaled
$1,637, $1,286, and $963 in 1996, 1995 and 1994, respectively. This expense was
offset by counterparty reimbursements of $767, $1,335 and $133, respectively,
during the same periods. In addition, the origination of certain fixed rate
loans was funded with variable rate FHLB advances, the interest cost of which
was hedged by the purchase of interest rate swap agreements. These agreements
represent an exchange of interest payments and require the Corporation to pay a
fixed rate and receive a LIBOR-based variable rate payment.
<PAGE>
Non-Interest Income
Non-interest income represented 27.0 percent of net FTE revenues in 1996 as
compared to 25.4 percent and 27.3 percent in 1995 and 1994, respectively. The
following table summarizes non-interest income for the three years ended
December 31, 1996.
Non-Interest Income
<TABLE>
<CAPTION>
Change from Prior Year
Amount 1996 1995
1996 1995 1994 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $12,620 $10,908 $ 9,500 $1,712 15.7% $ 1,408 14.8%
Mortgage banking revenue 10,064 7,662 9,113 2,402 31.3 (1,451) (15.9)
Insurance premiums
and commissions 7,872 7,059 7,492 813 11.5 (433) (5.8)
Trust and plan administration fees 6,930 5,169 4,538 1,761 34.1 631 13.9
Credit card and other
non-interest fees on loans 5,560 5,142 4,986 418 8.1 156 3.1
Investment products fees 3,337 3,035 2,816 302 10.0 219 7.8
Net securities gains 1,478 2,165 687 (687) (31.7) 1,478 215.1
Other non-interest income 7,664 5,521 7,673 2,143 38.8 (2,152) (28.0)
Total non-interest income $55,525 $46,661 $46,805 $8,864 19.0% $ (144) (.3)%
</TABLE>
Service charges on deposit accounts increased by 15.7 percent in 1996
compared to an increase of 14.8 percent in 1995. Growth in these fees is the
result of an increased number of deposit accounts, chargeable services and
higher activity fees resulting from acquisitions over the past two years and,
more recently, from improved efforts to collect a greater percentage of
assessable fees.
Mortgage banking revenue increased $2,402 compared to 1995 due primarily to
gains resulting from the securitization of residential mortgage loans. During
the first and third quarters of 1996, $235 million of mortgage loans were
securitized generating gains of $4.9 million. During 1995, the Corporation sold
mortgage servicing rights on a $220 million servicing portfolio and servicing
rights on originated mortgage loans at net gains of $2.6 million. The loans for
which the servicing rights had been sold were originated outside of the
Corporation's primary market by mortgage banking subsidiaries which discontinued
operations during 1993 and 1995. Excluding these gains, mortgage origination and
servicing fees increased 1.7 percent from 1995 to 1996. The volume of mortgage
loan originations increased during the third and fourth quarters of 1995 as
interest rates fell. Most of the fixed rate 15- and 30-year residential mortgage
loans are sold in the secondary market enabling the Corporation to generate fee
income and limit its long-term interest rate exposure. Loans are generally
priced to generate gains on sales, and no material losses were recorded during
1994 through 1996. The Corporation continues to service most of the sold loans,
particularly those originated in its primary markets. Income of $2,256 and
$2,348 in 1996 and 1995, respectively, related to the on-going servicing of sold
loans. At year-end, the Corporation was servicing $878,593 of residential
mortgage loans which had been sold. Mortgage loan origination and servicing
income decreased $1,451 in 1995 compared with 1994. The discontinuance of
operations of two mortgage banking subsidiaries, acquired in a 1995 merger
transaction, resulted in decreased loan originations and sales. These former
subsidiaries, based on the East and West Coasts, did not coincide with
Corporation's strategic plans and generated only marginal net operating results.
Additional information on mortgage banking activities is provided in Note 3 to
the consolidated financial statements.
Revenues from insurance premiums and commissions increased 11.5 percent in
1996 after decreasing 5.8 percent in 1995. Income from the sale of credit life
and disability insurance offered by the Corporation's banking subsidiaries
increased $559 or 18.1 percent in 1996 due to improved efforts to provide
coverage to loan customers. Casualty insurance premiums increased $320, or 9.1
percent. Profit sharing bonuses received from insurance underwriters during
1996, which are experience related and associated with prior year property and
casualty policies written, were $111 greater than payments received in 1995.
Profit sharing bonuses received during 1995, however, were $389 lower than
payments received in 1994. In addition, life and health insurance premiums also
decreased from 1994 by $557 as Citizens Insurance of Evansville has been
restricted by regulation from writing such policies since being acquired by the
Corporation during the fourth quarter of 1994.
Trust and plan administration fees increased $1,761 to $6,930 in 1996. The
May 31, 1996, acquisition of Small Parker & Blossom, a third party administrator
of employee benefit plans, accounted for $1,204 of this increase. Trust fee
income, based primarily on the market value of assets under management or
custody, increased 10.8 percent in 1996 compared to 13.9 percent in 1995. The
Corporation continues to increase its trust customer base and fee revenues
through product expansion and cross-selling services between affiliated
companies.
Credit card and other non-interest fees on loans, which consist of
origination fees, net of amortized costs and membership and processing fees,
increased $418, or 8.1 percent, to $5,560 in 1996 compared to a 3.1 percent
increase in 1995. These increases were substantially due to increased credit
card transaction volumes and loan application and processing fees.
Investment Product fees increased 10.0 percent and 7.8 percent in 1996 and
1995 as the Corporation continued to place greater emphasis on the sale of
annuities, mutual funds and other non-traditional banking products.
Net securities gains decreased from $2,165 in 1995 to $1,478 in 1996. During
1996, certain securities were sold through written covered call option contracts
and to take advantage of other market opportunities. Investment security gains
were generated in 1995 as the Corporation chose to minimize the increased
prepayment risks by selling certain higher coupon 15-year and balloon mortgage-
backed securities. During 1994, the Corporation took advantage of a steep yield
curve early in the year by selling certain U.S. Treasury notes at gains and
reinvesting the proceeds in mortgage-backed securities with higher current
yields and only slightly longer estimated average lives.
Other income increased $2,143 in 1996 compared with 1995. This increase is
due in part to $680 of revenue from expired interest rate option contracts, $548
of additional income from a corporate-owned life insurance program, increased
administrative service revenues of $218 and non-customer ATM access fees of
$487. During the fourth quarter of 1995, the Corporation sold the deposits and
premises of a branch located in Mt. Carmel, Illinois, which generated a gain of
$302. This office had only a small market share in Mt. Carmel and did not match
the Corporation's strategic plan. Other income totaled $5,521 in 1995 compared
to $7,673 in 1994. During the third quarter of 1994, the Corporation sold an
inactive charter of a wholly-owned subsidiary, resulting in a gain of $1,450.
After the charter sale, the Corporation's five Kentucky banks were merged into a
single bank. Also included in 1994 other income were gains of $364 and $479,
respectively, associated with the sale and change in market value of interest
rate caps in accordance with hedge accounting rules where the hedged liabilities
were terminated.
<PAGE>
Non-Interest Expense
Non-interest expenses increased 15.3 percent in 1996 compared with 1995,
primarily due to a $5.0 million SAIF assessment and $4.5 million in
personnel charges related to the continued centralization of back-office
functions and various other one-time charges related to closed offices and
equipment no longer used. Excluding these charges, non-interest expense
increased 7.3 percent due largely to expenses associated with merger
activities and expanded business activities, offset by the positive results
of continued cost containment efforts. The Corporation continues its
efforts to maintain control over its operating costs and has implemented
several strategies to further improve operating efficiencies, including
consolidating certain back-office operations and merging subsidiary banks
which are located in common markets. Non-interest expenses increased by 2.9
percent from 1994 to 1995.
<TABLE>
<CAPTION>
Non-Interest Expense
Change from Prior Year
Amount 1996 1995
1996 1995 1994 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $67,606 $58,453 $ 56,852 $ 9,153 15.7% $1,601 2.8%
Data processing and
other services 12,018 11,648 7,268 370 3.2 4,380 60.3
Occupancy 8,763 8,037 7,923 726 9.0 114 1.4
Equipment 7,181 6,850 6,832 331 4.8 18 .3
Advertising and promotion 4,430 3,446 2,832 984 28.6 614 21.7
Professional fees 3,894 3,787 3,106 107 2.8 681 21.9
Printing and supplies 3,675 3,667 3,080 8 .2 587 19.1
Postage and freight 3,473 3,005 2,726 468 15.6 279 10.2
Amortization of intangible assets 2,076 1,726 1,602 350 20.3 124 7.7
FDIC assessments 1,473 3,996 6,257 (2,523) (63.1) (2,261) (36.1)
SAIF assessment 4,963 4,963
Other non-interest expense 15,151 12,181 15,061 2,970 24.4 (2,880) (19.1)
Total non-interest expense $134,703 $116,796 $113,539 $17,907 15.3% $3,257 2.9%
</TABLE>
The largest category of non-interest expense is salaries and employee
benefits expense, which in 1996 accounted for 50.2 percent of total non-interest
expense and amounted to $67,606 compared with $58,453 in 1995. Incentive
compensation increased $4,286 to $7,925 in 1996 and represented 11.7 percent of
salaries and employee benefits expense compared to 6.2 percent in 1995. The
Corporation continued to shift its compensation plans to performance-based
awards tied to net income per share and expand its product line and sales of
fee-based services. Salaries increased $4,133 in 1996, with approximately $1.6
million due to increased staff from acquisitions where prior periods were not
restated. Salaries and benefits expense increased 2.8 percent in 1995 to $58,453
from 1994 due primarily to increased incentive commissions resulting from
increased sales activity.
Data processing and other services increased 3.2 percent in 1996 after
increasing 60.3 percent in 1995. The 1995 increase was due to increased services
provided and operating expenses assumed by a third party for management of the
Corporation's data processing facility. While there was no material change in
total operating expense due to this agreement, changes in individual expense
categories did occur from 1994 to 1995.
Occupancy and equipment expenses increased by 9.0 percent and 4.8
percent, respectively, in 1996 as the Corporation was operating two additional
banking offices, five additional finance offices and two new non-banking
subsidiaries at year-end 1996 compared to year-end 1995. These expenses
increased 1.4 percent and .3 percent, respectively, in 1995 compared with 1994.
Advertising and promotion expense increased 28.6 percent in 1996 and
21.7 percent in 1995. The increase in 1996 was due to increased marketing
efforts related to loan and deposit promotions, non-traditional banking services
and corporate identity promotions. Marketing efforts in 1995 centered on product
and service awareness, but also required additional corporate identity efforts
due to the seven acquisitions completed that year.
Amortization of intangible assets increased 20.3 percent and 7.7
percent in 1996 and 1995, respectively. During 1996, the Corporation completed
three acquisitions accounted for under the purchase method of accounting.
Goodwill resulting from these acquisitions totaled $6.4 million and is being
amortized on a straight-line basis over periods not exceeding 15 years. One
purchase transaction was completed in August 1995, resulting in goodwill of $5.3
million being amortized over 15 years.
Federal Deposit Insurance Corporation (FDIC) assessments decreased in
both 1995 and 1996. However, the FDIC assessment decrease in 1996 was offset by
a special, one-time assessment of $4,963 on deposits insured by the Savings
Association Insurance Fund (SAIF). The FDIC assessment rate was reduced from
$.23 to $.04 per one-hundred dollars of deposits insured by the Bank Insurance
Fund (BIF) effective June 1, 1995. For 1996, the FDIC's BIF-insured deposit
premium was zero. The portion of the Corporation's deposits acquired from
thrifts over the years, totaling $871 million, remained insured by SAIF. In
September 1996, legislation enacted by Congress imposed a one-time special
assessment of $.657 per one-hundred dollars of deposits insured by SAIF,
resulting in a $4,963 charge to the Corporation. As a result of the legislation
and related assessment, the annual assessment rates for SAIF-insured deposits
decreased from $.23 to zero effective October 1, 1996. FDIC rates effective
January 1, 1997, including the required Financing Corporation bond payments,
will be $.0644 for SAIF-insured deposits while the annual assessment rate for
BIF-insured deposits will be $.0129. The Corporation expects its future FDIC
assessments to be reduced approximately $1.1 million annually due to the change
in FDIC rates from that paid prior to the September 30 legislation.
Professional fees, printing and supplies, and postage and freight
increased from 1995 due to the acquisitions and generally higher levels of
business activity. Professional fees and printing and supplies increased 21.9
percent and 19.1 percent, respectively, in 1995 due to mergers of several
entities into the Corporation. Other expense increased 24.4 percent, or $2,970
in 1996 compared with 1995. Charges of $1,983, primarily related to the closure
of five offices recorded during the first quarter 1996 and charges of $922 for
equipment write-offs and other one-time operational charges recorded during the
third quarter, account for the majority of the increase. Other expense decreased
$2,880 in 1995 compared with 1994. Charges of $1,482 for warranty losses on sold
loans were recognized during 1994 and were required due to representations and
warranties made to purchasers of loans and mortgage servicing rights of loans
originated by the mortgage banking companies which were subsequently sold.
Expenses related to the management of foreclosed properties decreased $435 in
1995 compared to 1994.
<PAGE>
Income Taxes
Income tax expense for 1996 was $19,523, as compared to $20,710 recorded in 1995
and $16,793 in 1994. The effective tax rate for the current year decreased to
34.1 percent from 36.7 percent and 35.5 percent in 1995 and 1994, respectively.
The decline in the effective tax rate is attributable to an increase in income
from tax exempt sources, including municipal investments and corporate-owned
life insurance. Tax exempt interest income increased by $2,899 in 1996 as
additional investments in municipal securities were made. In addition,
investments in corporate-owned life insurance policies on certain officers were
made, generating $548 of additional income in 1996 compared with 1995. Internal
Revenue Code Section 42 low-income housing tax credits recorded in 1996 were
$296 greater than the previous year. Income taxes are also discussed in Note 12
of the consolidated financial statements.
<TABLE>
<CAPTION>
Quarterly Results of Operations
Mar. 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
1996
Net interest income $34,392 $36,102 $37,394 $37,713
Provision for loan losses 1,602 1,985 2,334 3,285
Net securities gains 406 148 134 790
Non-interest income 13,573 11,526 15,925 13,023
SAIF assessment 4,963
Non-interest expenses 31,629 30,545 35,728 31,838
Income before income taxes 15,140 15,246 10,428 16,403
Income taxes 5,455 5,407 3,032 5,629
Net income $ 9,685 $ 9,839 $ 7,396 $10,774
Net income per share $ .51 $ .51 $ .38 $ .56
Income per share excluding SAIF assessment $ .54
1995
Net interest income $32,891 $32,785 $33,511 $34,248
Provision for loan losses 1,554 1,497 979 2,909
Net securities gains 130 1,072 86 877
Non-interest income 10,127 10,740 12,401 11,228
Non-interest expenses 29,162 29,806 29,057 28,771
Income before income taxes 12,432 13,294 15,962 14,673
Income taxes 4,518 4,963 5,926 5,303
Net income $ 7,914 $ 8,331 $10,036 $ 9,370
Net income per share $ .41 $ .43 $ .53 $ .49
</TABLE>
Financial Condition
The financial condition of CNB Bancshares at December 31, 1996, is presented in
the comparative balance sheet of the consolidated financial statements. The
following discussion addresses loans and other components of earning assets,
sources of funds, capital resources, and liquidity and interest rate
sensitivity.
Loans
Loans at December 31, 1996, excluding real estate loans held for sale, grew 12.6
percent to $2,219,651 compared to $1,971,454 at the previous year-end. Growth
was experienced in all loan categories during 1996 except for tax exempt loans.
The Corporation expects tax exempt loans to continue to decline in the future
because the Tax Reform Act of 1986 generally reduced their availability. Average
loans were $2,079,674 during 1996, which represented a 2.8 percent decline from
1995 as a result of the Corporation securitizing $235 million of residential
mortgage loans during 1996.
Commercial loans increased 17.3 percent to $651,862 compared with $555,571 at
year-end 1995. Average commercial loan balances increased $253,269 to $588,867
in 1996 and were impacted by a December 31, 1995, reclassification of $214,550
of real estate mortgage loans secured by owner-occupied commercial or service
related businesses from real estate mortgage loans. Management believes that
classifying such loans as commercial loans is more consistent with their
underwriting criteria and also more accurately reflects the credit risk
associated with such loans. Prior years' loan balances in the accompanying
tables have not been reclassified using this criteria. Therefore, the $237,613
increase in commercial loans from December 31, 1994, to December 31, 1995, must
be viewed in the context of the reclassification.
Real estate mortgage loans, which consist of residential, commercial and
agricultural loans secured by real estate, and construction loans, increased
12.8 percent from 1995 and accounted for 43.3 percent of the total loan
portfolio at December 31, 1996. Residential mortgage loans were 32.5 percent of
total loans at December 31, 1996 as compared to 33.8 percent at the end of the
prior year. The aggregate of commercial and agricultural mortgage, and
construction loans represented 10.8 percent of total loans at year-end 1996 as
compared to 9.4 percent at the end of last year. In addition to the
securitization of residential mortgage loans described above, $90,463 of such
loans were sold in the secondary market during 1996. At year-end 1996, real
estate loans held for sale totaled $6,457 compared to $222,157 one-year prior.
Customer preference in the current rate environment has shifted to fixed rate
15-year and shorter term balloon loans which the Corporation may hold rather
than sell in the secondary market. Current asset-liability management policy
dictates that most adjustable rate and fixed rate loans with original maturities
exceeding 15 years are sold in the secondary market or securitized. Fixed rate
balloon and 15-year mortgage loans may be sold, securitized and carried in the
available for sale investment portfolio or held in the loan portfolio, depending
on market conditions at the time the loan is originated. While the Corporation
may sell certain loans in the secondary market, servicing rights are generally
retained. At year end, $878,593 of residential mortgage loans originated by the
Corporation's banks and subsequently sold in the secondary market were being
serviced.
Consumer loans, which include installment, home equity and credit card loans,
increased 8.2 percent to $585,345 at December 31, 1996. Of the $44,433 increase,
$19,172 was the result of 1996 acquisitions. Installment loan balances increased
$25,017 during 1996 due to increased indirect automobile loan applications. Home
equity and other revolving lines of credit outstandings averaged $85,149 during
1996, which represented an increase of 21.8 percent over 1995. Credit card
outstandings averaged $34,622 during 1996 compared to $37,061 in 1995.
Management elected not to offer any significant credit card solicitations during
1996 in light of the increase in credit card delinquencies and charge-offs being
experienced by the credit card industry nationally. New applications were
accepted, however, from the Corporation's customer base.
The Corporation's loan portfolio contains no loans to foreign governments,
foreign enterprises, foreign operations of domestic companies, or highly-
leveraged transactions, nor any concentrations to borrowers engaged in the same
or similar industries that exceed 10 percent of total loans.
<PAGE>
<TABLE>
<CAPTION>
Loans Outstanding at December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial, industrial and
agricultural production $ 651,862 $ 555,571 $ 317,958 $ 284,981 $ 224,680
Tax exempt 21,689 23,354 25,248 26,788 34,722
Real estate mortgage:
Commercial and agricultural 171,715 136,941 340,792 307,516 305,981
Construction 67,428 48,690 68,957 43,006 31,554
Residential 721,612 665,986 828,667 702,745 620,052
Consumer 585,345 540,912 536,504 476,421 379,438
Total $2,219,651 $1,971,454 $2,118,126 $1,841,457 $1,596,427
Note: Owner-occupied commercial real estate loans were reclassified to
commercial, industrial and agricultural production loans at December 31, 1995.
Loan Maturities at December 31, 1996
Within 1-5 Over 5
1 Year Years Years Total
Commercial, industrial, agricultural
production and tax exempt $ 346,500 $ 184,341 $ 142,710 $ 673,551
Real estate mortgage 150,986 292,518 517,251 960,755
Consumer 213,465 357,951 13,929 585,345
Total $ 710,951 $ 834,810 $ 673,890 $2,219,651
</TABLE>
Of the loans with maturities of over one year, $651,821 had floating interest
rates and the remainder had fixed interest rates.
Risk Management and Allowance for Loan Losses
An allowance for loan losses is maintained at a level considered adequate by
management to absorb potential loan losses as determined by evaluations of the
loan portfolio on a continuing basis. This evaluation by management includes
consideration of past loan loss experience, changes in the composition of the
loan portfolio, the volume and condition of the loan portfolio, expected cash
flows or the observable market price of the loans or the fair value of the
collateral for impaired loans, as well as the financial condition of specific
borrowers and current economic conditions.
Loans with principal or interest payments contractually due but not yet
paid are reviewed weekly by management and are placed on nonaccrual status when
scheduled payments remain unpaid for 90 days or more, unless the loan is both
well secured and in the process of collection. Interest income on nonaccrual
loans is recorded when actually received (cash basis) in contrast to the accrual
basis, which records income over the period in which it is earned, regardless of
when it is received. Loans are charged to the allowance for loan losses when
deemed uncollectible by management, unless sufficient collateral exists to
adequately secure the loan.
The allowance for loan losses at December 31, 1996, was $30,312 compared
with $28,806 at the end of 1995. Loans outstanding increased by 12.6 percent,
which resulted in a year-end 1996 ratio of allowance for loan losses to loans
outstanding of 1.37 percent compared with 1.46 percent at December 31, 1995. The
allowance for loan losses equaled 143 percent and 138 percent of total non-
performing loans at December 31, 1996 and 1995, respectively.
The provision for loan losses represents a charge against income and a
corresponding increase to the allowance for loan losses. The 1996 provision was
increased by $2,267 compared to 1995 due in part to the growth in the loan
portfolio and to provide for increased loan charge-offs. Net charge-offs to
average loans increased to .46 percent in 1996 from .35 percent in 1995. The
most significant increase in net charge-offs was in the consumer loan portfolio,
due in part to the additional consumer finance offices acquired in May 1996.
Management made efforts during 1996 to better monitor the underwriting of
consumer loans and has implemented a credit scoring system for consumer loan
applications. Additionally, efforts have been made to improve the collection of
past due and previously charged-off loans. Consumer loans 30-days or more
delinquent decreased from $10.0 million, or 1.99% of total consumer loans, at
December 31, 1995, to $8.5 million, or 1.88%, at December 31, 1996.
A summary of loan loss experience and management's allocation of the
allowance for loan losses to the various loan categories for the years indicated
follow.
<TABLE>
<CAPTION>
Summary of Loan Loss Experience
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
Balance at January 1, $28,806 $28,502 $23,443 $22,335 $20,711
Allowance of subsidiaries at acquisition date 1,872 769 1,118 924
Adjustment to conform year-ends 561
Loan charge-offs:
Commercial, agricultural and tax exempt 3,516 2,839 1,698 1,958 3,684
Real estate mortgage 1,098 208 535 1,393 3,464
Consumer 8,251 6,447 3,400 2,779 3,853
Total charge-offs 12,865 9,494 5,633 6,130 11,001
Loan recoveries:
Commercial, agricultural and tax exempt 1,733 915 638 902 2,275
Real estate mortgage 335 136 216 484 151
Consumer 1,225 1,039 925 1,038 1,008
Total recoveries 3,293 2,090 1,779 2,424 3,434
Net charge-offs 9,572 7,404 3,854 3,706 7,567
Provision for loan losses 9,206 6,939 7,234 3,890 9,191
Balance at December 31, $30,312 $28,806 $28,502 $23,443 $22,335
Ratio of net charge-offs to average
loans outstanding .46% .35% .20% .22% .45%
Ratio of provision for loan losses to
average loans outstanding .44 .32 .37 .23 .55
Ratio of allowance for loan losses to
total loans outstanding at year-end 1.37 1.46 1.35 1.27 1.40
</TABLE>
<PAGE>
Management's Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
Allowance Amount Percent of Loans to Total Loans
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
agricultural
and tax exempt $12,122 $ 9,872 $ 7,879 $ 6,979 $ 8,206 30% 29% 16% 17% 16%
Real estate mortgage 7,008 8,712 9,831 6,720 5,991 43 43 59 57 60
Consumer 9,652 8,523 9,060 7,821 6,222 27 28 25 26 24
Unallocated 1,530 1,699 1,732 1,923 1,916
Total $30,312 $28,806 $28,502 $23,443 $22,335 100% 100% 100% 100% 100%
</TABLE>
Note: Owner-occupied commercial real estate loans were reclassified to
commercial, industrial and agricultural production loans at December 31, 1995.
Risk assets consist of loans on nonaccrual status, loans classified as
troubled debt restructurings, foreclosed properties and loans 90 days or more
past due but continuing to accrue interest. Although these assets have more than
a normal risk of loss, they will not necessarily result in a higher level of
losses in the future. The following table presents risk assets for the past five
years. In addition to the loans classified as non-performing, there were other
loans totaling $9,220 at December 31, 1996, where the borrowers were
experiencing difficulties, and where management was closely monitoring the
borrowers' abilities to comply with payment terms. However, conditions at this
time do not warrant their classification as non-performing loans. In January
1997, one such credit of $4,685 was paid in full. Management is not aware of any
loans that have not been disclosed that represent or result from trends or
uncertainties which may have a material impact on the Corporation's future
operating results, liquidity or capital resources.
<TABLE>
<CAPTION>
Asset Quality at December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual:
Commercial, agricultural, and tax exempt $ 9,612 $10,393 $ 3,945 $ 3,849 $ 2,681
Real estate mortgage 8,347 6,326 6,053 3,750 5,221
Consumer 1,926 3,194 1,983 1,706 3,273
Total nonaccrual 19,885 19,913 11,981 9,305 11,175
Restructured:
Commercial, agricultural, and tax exempt 657 479 892 4,218 857
Real estate mortgage 558 464 168 261 281
Consumer 42 5 5
Total restructured 1,257 948 1,065 4,479 1,138
Total non-performing loans 21,142 20,861 13,046 13,784 12,313
Foreclosed properties 1,721 1,727 3,849 6,991 8,361
Total non-performing assets 22,863 22,588 16,895 20,775 20,674
90 days or more past due and accruing:
Commercial, agricultural, and tax exempt 267 344 241 371 304
Real estate mortgage 1,825 1,285 1,488 1,113 1,189
Consumer 1,451 598 1,204 925 471
Total 90 days or more past due and accruing 3,543 2,227 2,933 2,409 1,964
Total risk assets $26,406 $24,815 $19,828 $23,184 $22,638
Non-performing loans to loans .95% 1.06% .62% .75% .77%
Non-performing assets to loan-related assets 1.03 1.14 .80 1.12 1.29
Risk assets to loan-related assets 1.19 1.26 .93 1.25 1.41
</TABLE>
<PAGE>
Investment Securities
Total investment securities available for sale and held to maturity represented
40.2 percent of average earning assets in 1996 compared to 33.9 percent in 1995.
This increase in the investment portfolio was primarily the result of the
Corporation securitizing residential mortgage loans, as previously discussed.
The portfolio has continued to shift toward investments in fixed and variable
rate mortgage-backed securities, predominantly underwritten to the standards of
and guaranteed by government sponsored agencies. These securities generally
yield 70-100 basis points more than comparable U.S. Treasury securities.
Mortgage-backed securities differ primarily from traditional debt securities in
that they have uncertain maturity dates and are priced based on estimated
prepayment rates on the underlying mortgages. Prepayment rates generally can be
expected to increase during periods of lower interest rates as some of the
underlying mortgages are refinanced at lower rates. Conversely, the average
lives of these securities generally are extended as interest rates increase.
Mortgage-backed securities represented 73.1 percent and 72.0 percent of total
investment securities at December 31, 1996 and 1995, respectively. The estimated
average lives of these securities and the overall portfolio were 3.1 years and
4.0 years, respectively, at December 31, 1996, based on current prepayment
expectations.
Sources of Funds
The Corporation generally relies on customers' deposits, securities sold under
repurchase agreements, federal funds purchased and other borrowed funds along
with shareholders' equity, to fund its earning assets. Certain of the
Corporation's banks are members of the Federal Home Loan Bank (FHLB). As
members, the banks may obtain FHLB advances with various maturities and interest
rate options by pledging qualifying mortgage assets. These advances totaled
$158,640 and $115,794 at December 31, 1996, and 1995, respectively, as described
in Note 9 of the consolidated financial statements. The Corporation expects to
continue utilizing the FHLB as a funding source for its banks as circumstances
may warrant.
Average total deposits increased 6.5 percent to $2,858,132 in 1996 compared
to 1995. Average non-interest bearing checking deposits increased 5.6 percent in
1996 and 1.8 percent in 1995 while interest bearing deposits grew 6.6 percent in
1996 and 2.7 percent in 1995. During 1996, the mix of interest bearing deposits
shifted to certificates of deposit as competitive pricing on these products
modified customers' previous preferences of interest bearing checking, savings
and money market deposit accounts.
<TABLE>
<CAPTION>
Average Deposits
1996 1995 1994
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing checking $ 309,439 $ 293,051 $ 287,963
Interest bearing checking 403,831 2.16% 395,874 2.47% 422,396 2.40%
Money market savings 294,936 3.93 255,875 3.81 270,585 2.72
Other savings 236,791 2.52 250,449 2.67 290,173 2.63
Certificates of deposit and other time 1,613,135 5.60 1,487,838 5.55 1,343,685 4.62
Total $2,858,132 4.08% $2,683,087 4.05% $2,614,802 3.33%
Maturities of Certificates of Deposit of $100 or More at December 31,
1996 1995
3 months or less $122,787 $ 53,653
3-6 months 41,832 28,144
6-12 months 41,860 19,682
Over 12 months 20,121 8,349
Total $226,600 $109,828
</TABLE>
Securities sold under repurchase agreements are acquired in national
markets as well as from the Corporation's commercial customers as a part of a
cash management service. Repurchase agreements generally provide the Corporation
with a lower interest cost than similar sources of funds and were $530,261 at
December 31, 1996, compared to $325,271 at year-end 1995. A portion of these
repurchase agreements, acquired to fund certain fixed rate earning assets, are
being hedged by interest rate caps. Securities sold under repurchase agreements
averaged $406,678 in 1996 compared to $302,004 in 1995.
Federal funds purchased and other short-term borrowings increased by $3,797
to $29,608 at December 31, 1996. Federal funds purchased are overnight funds
acquired from other banks and represent a service performed for smaller area
banks while providing an additional source of funding for the Corporation.
Federal funds purchased totaled $21,730 at December 31, 1996, compared to
$18,370 one year prior. Other short-term borrowings, principally U.S. Treasury
demand notes, totaled $7,878 at December 31, 1996. These demand notes are
subject to call by the Federal Reserve and carry a variable interest rate.
<PAGE>
Capital Resources
The Corporation continues to maintain a strong capital position which supports
its current needs and provides a sound foundation to support further expansion.
At December 31, 1996, shareholders' equity had increased to $312,298. The amount
of net earnings retained after the payment of dividends was $22,022 for 1996
compared to $25,457 in the prior year. The dividend payout ratio was 42 percent
in 1996 compared to 29 percent in 1995 and was consistent with management's
policy of maintaining an appropriate balance between earnings distributed to
shareholders in the form of dividends and earnings retained to provide for
internal capital growth. The Corporation's Board of Directors changed the
declaration date of the 1995 fourth quarter dividend from December 1995 to
January 1996. Consequently, only three quarterly dividends were declared in
1995. This change resulted in 1995 dividends declared being reduced by $3,753.
The payout ratio would have been 39 percent in 1995 excluding the one-time
effect of this change. Book value per share at year-end 1996 increased to $16.29
from $15.84 one year earlier, an increase of 2.8 percent. Shareholders' equity
averaged $303,446 during 1996, an increase of 6.1 percent from 1995.
In order to maintain its capital position at a desired level, the
Corporation maintains a stock repurchase program whereby up to 5 percent of its
outstanding shares can be repurchased annually for various corporate purposes,
including but not limited to the Dividend Reinvestment Plan and the annual stock
dividend distribution. During 1996, the Corporation repurchased $16,278 of its
common stock under this program.
After adjusting for stock dividends, dividends paid per share were $.74 for
1995 and were increased by 10.8 percent in 1996 to $.82. The indicated annual
dividend rate is currently $.88 per share. The Corporation's return on equity,
excluding the SAIF recapitalization charge, was 13.43 percent for 1996 compared
to 12.47 percent in 1995 and 11.01 in 1994.
Liquidity and Interest Rate Sensitivity
Liquidity is a measure of the Corporation's ability to meet its customers'
present and future deposit withdrawals and/or increased loan demand without
unduly penalizing earnings. Interest rate sensitivity involves the relationship
between rate sensitive assets and liabilities and is an indication of the
probable effects of interest rate movements on the Corporation's net interest
income. CNB Bancshares manages both its liquidity and interest sensitivity
through a coordinated asset/liability management program directed by the Funds
Management and Investment Committee.
Liquidity is provided by projecting credit demand and other financial needs
and then maintaining sufficient funding sources and assets readily convertible
into cash to meet these requirements. The Corporation has provided for its
liquidity needs by maintaining adequate balances in money market assets, through
growth in core deposits, maturing loans and investments in its securities
portfolio and by maintaining various short-term borrowing sources. At December
31, 1996, the Corporation had $273,973 or 6.7 percent of total assets in
investment securities maturing within one year. In addition, the Corporation had
$159,000 available from unused federal funds purchased agreements and in excess
of $248,000 of available borrowing capacity from the Federal Home Loan Bank.
Management believes that maturing investment securities and unused borrowing
sources will be adequate to meet the banks' and the Corporation's liquidity
needs for the foreseeable future.
The Parent Company's liquidity includes its cash and short-term investments
and is generally provided by dividends and management fees received from the
subsidiary banks. As explained in Note 16 of the consolidated financial
statements, approximately $35,951 was available to the Parent at December 31,
1996, from dividends by banking subsidiaries without prior regulatory approval.
Cash dividends received from the subsidiaries in 1996 were $26,100 compared to
$46,003 in 1995. The Parent Company also has available a $20,000 bank line of
credit which was not being utilized at year-end.
Interest rate sensitive assets and liabilities are those which have yields
or rates subject to change within a future time period due to maturity or
changes in market rates. An ongoing objective of the Corporation's
asset/liability policy is to match rate-adjustable assets and liabilities at
similar maturity horizons so that changes in interest rates will not result in
wide fluctuations in net interest income. CNB Bancshares manages its rate
sensitivity position through the use of variable rate loans and by matching
funds acquired, having a specific maturity, with loans, securities or money
market investments with similar maturities. The Corporation supplements this
approach through the use of interest rate contracts to reduce the impact of
changing interest rates on its cost to acquire certain variable rate funds.
These contracts are described in Note 14 to the Consolidated Financial
Statements. The Corporation employs a variety of measurement techniques to
identify and manage its exposure to changing interest rates. A simulation model
is used to measure the Corporation's net interest income volatility to changes
in the level of interest rates, interest rate spreads, the shape of the yield
curve and changing product growth patterns and investment strategies. Results of
the simulation model indicate that the Corporation's net interest income would
be affected by 1.2% or less should interest rates increase or decrease by up to
200 basis points. Additionally, a rate sensitivity position is computed for
various repricing intervals by calculating rate sensitivity gaps. The following
table shows the Corporation's interest rate sensitivity analysis as of December
31, 1996. Interest earning assets and interest bearing liabilities have been
distributed based on their repricing opportunities. The maturities of certain
investments, loans and deposits have been adjusted based on projected prepayment
patterns or historical relationships to changes in market interest rates. The
repricing of certain liabilities has been adjusted to reflect the expected
benefit of interest rate contracts in place at year-end. Although rate
sensitivity gaps constantly change as funds are acquired and invested, the
Corporation's negative gap of $34,327 at one year or less as of December 31,
1996, was approximately .8 percent of total assets. This, in the opinion of
management, represented a relatively balanced position. Net interest income at
financial institutions with negative gaps tends to increase in periods of
falling interest rates and decline as interest rates rise.
<PAGE>
STATIC Interest Rate Sensitivity at December 31, 1996
<TABLE>
<CAPTION>
Maturing or Repricing
<S> <C> <C> <C> <C> <C> <C>
Non-Sensitive
1-90 91-180 181 Days Over 1 Year and Over
Days Days to 1 Year to 5 Years 5 Years Total
Assets
Federal funds sold and
money market investments $ 31,808 $ 45 $ 31,853
Real estate loans held for sale 6,457 6,457
Investment securities available for sale 219,718 $ 84,819 $163,992 564,391 $ 311,039 1,343,959
Investment securities held to maturity 17,210 6,521 13,248 74,692 136,417 248,088
Loans, net of unearned interest 854,564 188,526 319,682 742,194 114,685 2,219,651
Non-earning assets 267,981 267,981
Total assets 1,129,757 279,866 496,922 1,381,322 830,122 4,117,989
Liabilities and shareholders' equity
Interest bearing deposits:
Interest bearing checking accounts* 82,137 328,556 410,693
Money market and other savings* 274,242 273,407 547,649
Certificates of deposit and other time 380,898 257,245 447,152 599,662 32,399 1,717,356
Total interest bearing deposits 737,277 257,245 447,152 599,662 634,362 2,675,698
Securities sold under
repurchase agreements 365,569 8,493 6,129 150,070 530,261
Federal funds purchased and other
short-term borrowings 29,608 29,608
Long-term debt 88,901 166 332 82,652 4,679 176,730
Non-interest bearing deposits* 354,529 354,529
Non-interest bearing liabilities
and shareholders' equity 351,163 351,163
Total liabilities and equity 1,221,355 265,904 453,613 832,384 1,344,733 $4,117,989
Interest sensitivity gap $ (91,598) $ 13,962 $ 43,309 $ 548,938 $ (514,611)
Cumulative interest sensitivity gap $ (91,598) $(77,636) $(34,327) $ 514,611
Cumulative gap as a percentage
of total assets (2.2)% (1.9)% (.8)% 12.5%
</TABLE>
* The Corporation's experience with interest bearing checking accounts, money
market and savings and non-interest-bearing deposits has been that, although
these deposits are subject to immediate withdrawal or repricing, a portion of
the balances has remained relatively constant in periods of both rising and
falling rates. Therefore a portion of these deposits is included in the "Non-
Sensitive" category.
<PAGE>
Average Balance Sheet and Net Interest Income Analysis
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average Average Average Average
Balances Interest Rates Balances Interest Rates Balances Interest Rates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold and other short-
term money market investments $ 16,763 $ 960 5.73% $ 23,319 $ 1,418 6.08% $ 50,416 $ 1,805 3.58
Real estate loans held for sale 57,809 4,661 8.06 23,113 1,899 8.22 33,913 2,602 7.67
Investment securities:
Taxable 1,298,844 88,401 6.81 1,037,083 68,743 6.63 946,048 54,570 5.77
Tax exempt (1) 148,690 12,224 8.22 85,358 7,648 8.96 74,505 7,279 9.77
Total investment securities 1,447,534 100,625 6.95 1,122,441 76,391 6.81 1,020,553 61,849 6.06
Loans: (2) (3)
Commercial and industrial 588,867 53,576 9.10 335,598 32,641 9.73 301,027 24,692 8.20
Tax exempt (1) 21,240 2,164 10.19 23,982 2,536 10.57 25,778 2,427 9.42
Real estate mortgage 911,256 78,438 8.61 1,243,944 106,455 8.56 1,110,410 89,527 8.06
Consumer 558,311 60,598 10.85 535,903 55,720 10.40 513,018 47,335 9.23
Total loans 2,079,674 194,776 9.37 2,139,427 197,352 9.22 1,950,233 163,981 8.41
Total earning assets 3,601,780 301,022 8.36 3,308,300 277,060 8.37 3,055,115 230,237 7.53
Less: Allowance for loan losses 29,427 28,811 25,897
Cash and due from banks 93,528 99,687 104,917
Premises and equipment 68,990 68,187 70,122
Other assets 97,864 82,144 74,693
Total assets $3,832,735 $3,529,507 $3,278,950
Liabilities
Interest bearing deposits:
Interest bearing checking
accounts $ 403,831 $ 8,741 2.16% $ 395,874 $ 9,783 2.47% $ 422,396 $10,122 2.40
Money market savings accounts 294,936 11,579 3.93 255,875 9,758 3.81 270,585 7,348 2.72
Other savings accounts 236,791 5,968 2.52 250,449 6,678 2.67 290,173 7,618 2.63
Certificates of deposit
and other time 1,613,135 90,318 5.60 1,487,838 82,559 5.55 1,343,685 62,062 4.62
Total interest bearing deposits 2,548,693 116,606 4.58 2,390,036 108,778 4.55 2,326,839 87,150 3.75
Securities sold under repurchase
agreements 406,678 20,828 5.12 302,004 16,678 5.52 213,963 9,857 4.61
Federal funds purchased and
other short-term borrowings 48,822 2,573 5.27 31,139 1,818 5.84 37,302 1,591 4.27
FHLB advances and
other long-term debt 180,212 10,834 6.01 193,784 13,076 6.75 109,977 7,179 6.53
Total interest bearing
liabilities 3,184,405 150,841 4.74 2,916,963 140,350 4.81 2,688,081 105,777 3.94
Non-interest bearing
checking deposits 309,439 293,051 287,963
Other liabilities 35,445 33,599 25,760
Total liabilities 3,529,289 3,243,613 3,001,804
Shareholders' equity 303,446 285,894 277,146
Total liabilities and
shareholders' equity $3,832,735 $3,529,507 $3,278,950
Summary (4)
Interest income $ 301,022 8.36% $ 277,060 8.37% $ 230,237 7.53%
Interest expense 150,841 4.19 140,350 4.24 105,777 3.46
Net interest income/margin $ 150,181 4.17% $ 136,710 4.13% $ 124,460 4.07%
</TABLE>
(1) Tax exempt securities and loans have been adjusted to a fully tax
equivalent basis using a marginal tax rate of 35%.
(2) Nonaccrual loans have been included in the average balances.
(3) Loan income includes interest and fees on loans.
(4) Average rates have been computed by dividing by total earning assets.
<PAGE>
Consolidated Balance Sheet
(In thousands, except for share data)
<TABLE>
<CAPTION>
December 31, 1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 113,504 $ 130,239
Federal funds sold and other short-term money market investments 31,853 8,546
Total cash and cash equivalents 145,357 138,785
Real estate loans held for sale 6,457 222,157
Investment securities available for sale 1,343,959 972,320
Investment securities held to maturity (market value $249,150 in 1996 and $199,966 in 1995) 248,088 198,240
Loans, net of unearned income and allowance for loan losses 2,189,339 1,942,648
Premises and equipment 70,448 66,224
Intangible assets 30,965 23,741
Interest receivable 30,013 29,353
Other assets 53,363 35,214
Total Assets $4,117,989 $3,628,682
Liabilities
Deposits:
Non-interest bearing $ 354,529 $ 322,706
Interest bearing 2,675,698 2,467,283
Total deposits 3,030,227 2,789,989
Securities sold under repurchase agreements 530,261 325,271
Federal funds purchased and other short-term borrowings 29,608 25,811
FHLB advances and other long-term debt 176,730 158,046
Interest payable and other liabilities 38,865 31,872
Total Liabilities 3,805,691 3,330,989
Shareholders' Equity
Common stock, $1 stated value
Shares authorized: 50,000,000
Shares issued: 19,168,240 in 1996 and 17,894,770 in 1995 19,168 17,895
Capital surplus 264,189 246,492
Retained earnings 30,067 29,672
Net unrealized gains (losses) on investment securities available for sale (1,126) 3,634
Total Shareholders' Equity 312,298 297,693
Total Liabilities and Shareholders' Equity $4,117,989 $3,628,682
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Income
(In thousands, except for share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31, 1996 1995 1994
Interest Income
Loans, including fees:
Taxable $ 192,612 $ 194,816 $ 161,554
Tax exempt 1,462 1,708 1,628
Real estate loans held for sale 4,661 1,899 2,602
Investment securities:
Taxable 88,401 68,743 54,570
Tax exempt 8,346 5,201 4,891
Federal funds sold and other short-term money
market investments 960 1,418 1,805
Total interest income 296,442 273,785 227,050
Interest Expense
Deposits 116,606 108,778 87,150
Short-term borrowings 23,401 18,496 11,448
Long-term debt 10,834 13,076 7,179
Total interest expense 150,841 140,350 105,777
Net Interest Income 145,601 133,435 121,273
Provision for loan losses 9,206 6,939 7,234
Net Interest Income After Provision for Loan Losses 136,395 126,496 114,039
Non-Interest Income
Service charges on deposit accounts 12,620 10,908 9,500
Mortgage banking revenue 10,064 7,662 9,113
Insurance premiums and commissions 7,872 7,059 7,492
Trust and plan administration fees 6,930 5,169 4,538
Credit card and other non-interest fees on loans 5,560 5,142 4,986
Investment products fees 3,337 3,035 2,816
Net securities gains 1,478 2,165 687
Other non-interest income 7,664 5,521 7,673
Total non-interest income 55,525 46,661 46,805
Non-Interest Expense
Salaries and employee benefits 67,606 58,453 56,852
Data processing and other services 12,018 11,648 7,268
Occupancy 8,763 8,037 7,923
Equipment 7,181 6,850 6,832
Advertising and promotion 4,430 3,446 2,832
Professional fees 3,894 3,787 3,106
Printing and supplies 3,675 3,667 3,080
Postage and freight 3,473 3,005 2,726
Amortization of intangible assets 2,076 1,726 1,602
FDIC assessments 1,473 3,996 6,257
SAIF assessment 4,963
Other non-interest expense 15,151 12,181 15,061
Total non-interest expense 134,703 116,796 113,539
Income Before Income Taxes 57,217 56,361 47,305
Income taxes 19,523 20,710 16,793
Net Income $ 37,694 $ 35,651 $ 30,512
Net Income Per Share $ 1.96 $ 1.86 $ 1.60
Average Common and Equivalent Shares Outstanding 19,225,755 19,122,856 19,042,818
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Changes in
Shareholders' Equity
(In thousands, except for share data)
<TABLE>
<CAPTION>
Common Stock Capital Retained Unrealized
Shares Amount Surplus Earnings Gains/Losses Total
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 15,201,525 $15,202 $181,243 $ 68,873 $ 6,460 $271,778
Net income for 1994 30,512 30,512
Cash dividends (12,261) (12,261)
Stock dividend 1,563,658 1,564 52,685 (54,249)
Issuance of common stock for:
Dividend reinvestment plan 84,446 84 2,649 2,733
Stock options exercised 19,477 19 306 325
Exercise and conversion of stock
purchase contracts and debentures 149,380 149 2,916 3,065
Acquisitions 548,471 549 3,794 5,626 9,969
Other 11,646 12 467 479
Purchase and retirement of common stock (392,981) (393) (5,061) (6,239) (11,693)
Adjustment to conform year-ends 19,124 19 534 (7,238) (6,685)
Change in unrealized gains/losses on
investment securities available for sale (14,394) (14,394)
Balances, December 31, 1994 17,204,746 17,205 239,533 25,024 (7,934) 273,828
Net income for 1995 35,651 35,651
Cash dividends (10,194) (10,194)
Stock dividend 846,215 846 24,141 (24,987)
Issuance of common stock for:
Dividend reinvestment plan 108,984 109 2,984 3,093
Stock options exercised 193,037 193 1,552 1,745
Exercise and conversion of stock
purchase contracts and debentures 17,538 18 295 313
Acquisitions 387,491 387 2,053 4,178 6,618
Other 6,992 7 353 360
Purchase and retirement of common stock (870,233) (870) (24,419) (25,289)
Change in unrealized gains/losses on
investment securities available for sale 11,568 11,568
Balances, December 31, 1995 17,894,770 17,895 246,492 29,672 3,634 297,693
Net income for 1996 37,694 37,694
Cash dividends (15,672) (15,672)
Stock dividend 915,801 916 25,598 (26,514)
Issuance of common stock for:
Dividend reinvestment plan 127,090 127 3,433 3,560
Stock options exercised 98,423 98 843 941
Exercise and conversion of stock
purchase contracts and debentures 171,655 172 2,466 2,638
Acquisitions 499,200 499 900 4,887 6,286
Other 6,926 7 189 196
Purchase and retirement of common stock (545,625) (546) (15,732) (16,278)
Change in unrealized gains/losses on
investment securities available for sale (4,760) (4,760)
Balances, December 31, 1996 19,168,240 $19,168 $264,189 $ 30,067 $ (1,126) $ 312,298
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Operating Activities:
Net income $ 37,694 $ 35,651 $ 30,512
Adjustments to reconcile net
income to net cash provided by operating
activities:
Depreciation and amortization 13,759 11,044 9,694
Provision for loan losses 9,206 6,939 7,234
Amortization of premiums and discounts on securities 1,638 1,441 1,424
Deferred income tax benefit (447) (1,334) (2,489)
Net securities gains (1,478) (2,165) (687)
Loans originated for sale (74,615) (162,121) (452,576)
Proceeds from sale of loans 90,463 161,482 480,260
(Increase) decrease in interest
receivable and other assets,
net of amortization (21,033) (16,346) 13
Increase (decrease) in interest payable and other liabilities 6,133 8,474 (569)
Net Cash Provided by Operating Activities 61,320 43,065 72,816
Investing Activities:
Cash and cash equivalents of subsidiaries acquired, net of purchase price 2,869 4,050 5,708
Proceeds from the maturity of investment securities available for sale 275,510 154,227 235,310
Proceeds from the sale of investment securities available for sale 596,755 282,804 178,774
Purchase of investment securities available for sale (992,584) (469,552) (197,065)
Proceeds from the maturity of investment securities held to maturity 13,315 47,680 57,170
Purchase of investment securities held to maturity (52,040) (81,339) (346,840)
Net increase in loans (252,541) (38,554) (203,128)
Purchase of premises and equipment (10,323) (7,064) (4,937)
Net Cash Used by Investing Activities (419,039) (107,748) (275,008)
Financing Activities:
Net increase (decrease) in deposits 166,078 141,787 (46,396)
Net increase (decrease) in short-term borrowings 204,490 (6,988) 217,994
Payment and maturity of long-term debt (170,793) (199,830) (111,086)
Proceeds of long-term borrowings 191,965 144,549 131,551
Proceeds from exercise of stock options 941 1,745 325
Proceeds from common stock issued for dividend reinvestment plan 3,560 3,093 2,733
Purchase and retirement of common stock (16,278) (25,289) (11,693)
Cash dividends paid (15,672) (12,972) (11,777)
Net Cash Provided by Financing Activities 364,291 46,095 171,651
Net Increase (Decrease) in Cash and Cash Equivalents 6,572 (18,588) (30,541)
Adjustment to conform year-ends 2,311
Cash and Cash Equivalents at January 1, 138,785 157,373 185,603
Cash and Cash Equivalents at December 31, $ 145,357 $ 138,785 $ 157,373
Supplemental disclosure:
Cash paid for:
Interest $ 149,628 $ 134,914 $ 104,704
Income taxes 15,730 21,601 19,075
Non-cash investing and financing activities:
Common stock issued for acquisitions 6,286 6,618 9,969
Stock issued in exchange of
debentures and equity contracts
and pursuant to employee benefit plans 2,882 545 3,637
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except for share data)
1. Summary of Significant Accounting Policies
The accounting and reporting policies of CNB Bancshares, Inc. (Corporation) and
its subsidiaries conform to generally accepted accounting principles and
reporting practices followed by the banking industry. The more significant
policies are described below.
Basis of presentation
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries, after elimination of all material intercompany accounts
and transactions. Certain prior year amounts have been reclassified to conform
with current classifications.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Real estate loans held for sale
Real estate loans held for sale are carried at the lower of aggregate cost or
market value. Gains and losses on real estate loans sold are recorded at the
time of sale or securitization. Servicing fee income subsequent to the sale is
included in non-interest income. Originated mortgage servicing rights represent
total capitalized mortgage loan origination costs incurred allocated between the
loan and the servicing rights based on their relative fair values and amortized
over the estimated lives of the loans. The carrying value of such rights is
subject to periodic adjustment based upon changing market conditions.
Investment securities
Debt securities that the Corporation has the positive intent and ability to hold
to maturity are classified as held to maturity and reported at amortized cost.
Other investment securities are classified as available for sale or trading and
reported at fair value with unrealized gains and losses included in
shareholders' equity, net of related taxes, or income, respectively.
Amortization of premiums and accretion of discounts are recorded as
adjustments to interest income using the level-yield method over the estimated
remaining period until maturity, adjusted for estimated prepayments. Gains and
losses on the sale of investment securities are determined on the specific
identification method at the time of sale.
Loans and allowance for loan losses
Loans are reported net of unearned interest, unamortized deferred fees and costs
and the allowance for loan losses. Interest income on loans is accrued on the
principal amount of such loans outstanding, except for discounted installment
loans which is computed using a method which approximates a level yield. Certain
nonrefundable loan fees and related direct loan costs are deferred and amortized
over the life of the loan as an adjustment to interest income. Loans are placed
on nonaccrual status when the collection of the interest becomes doubtful.
Interest accrued during the current year and deemed uncollectible is reversed
and charged against current income, while uncollectible interest accrued from
prior years is charged against the allowance for loan losses. Interest income on
nonaccrual loans is then recognized only when collected. A loan remains on
nonaccrual status until the loan is current as to payment of both principal and
interest, and/or the borrower demonstrates the ability to pay and remain
current.
Loans are considered impaired when it becomes probable that the Corporation
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impaired loans are measured by the present value of expected
future cash flows or the fair value of collateral, if the loan is collateral
dependent. Interest income on these loans is recognized as described above
depending on the accrual status of the loan.
The allowance for loan losses is increased by provisions charged to expenses
and reduced by loans charged off, net of recoveries. It is maintained at a level
considered adequate to absorb potential loan losses determined on the basis of
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience and
trends, changes in the composition of the loan portfolio, the current volume and
condition of loans outstanding and the probability of collecting all amounts
due.
Premises and equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method based on
estimated useful lives. Gains and losses on dispositions are included in
operations.
Foreclosed properties
Foreclosed properties represent properties acquired through foreclosure or deed
in lieu of foreclosure and are recorded at the lower of cost or fair value less
estimated costs to sell. Losses at the time of transfer from loans are charged
to the allowance for loan losses. Subsequent write-downs and gains or losses on
sales are included in operations. Rental income and costs of maintaining the
properties are also included in operations.
Intangible assets
The excess of cost over the fair value of net assets and other intangibles
acquired in acquisitions accounted for as purchases are amortized using the
straight-line method over estimated lives up to 25 years. Such assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amounts of these assets may not be recoverable.
<PAGE>
Interest rate contracts
The Corporation reduces the potential impact of changing interest rates on its
costs to acquire liabilities that fund certain loans and investments through
interest rate contracts, including interest rate swaps, interest rate caps and
optional forward purchase contracts.
The net settlements received or paid on interest rate swaps are reported as
adjustments to interest expense of the related liabilities being hedged.
Premiums paid for interest rate caps are included in the carrying amounts of
those liabilities being hedged. These amounts are amortized as an adjustment to
interest expense of the related liabilities on a straight-line method over the
contractual terms of the caps. Interest expense is reduced on a current basis as
amounts are earned from counterparties when the index rate exceeds the rate
contractually specified in the cap agreements.
Optional forward purchase contracts provide the option buyer with the right to
sell to, or purchase from, another party some financial instrument at a stated
price on or prior to a specified future date. Fees received from the sale of
written options are deferred until the option expires, is terminated, or is
exercised, at which point the fees are included in current operations.
Gains or losses on the termination of interest rate contracts used to hedge
changes in interest rates are included in the carrying amounts of those
liabilities being hedged and are amortized as an adjustment to the yield of the
hedged liability over its remaining life. Gains or losses on the early
termination of a hedged transaction are included in current operations.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax basis. The Corporation
and its subsidiaries file consolidated income tax returns.
Net income per share
Net income per share has been computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during each
period. The assumed conversion of the convertible subordinated debentures into
common shares had no material dilutive effect on net income per share. All share
data included in the consolidated financial statements has been adjusted for
stock dividends.
Stock option plans
Prior to January 1, 1996, the Corporation accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense was recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Corporation adopted Financial Accounting Standards Board
Statement (FASB) No. 123, "Accounting for Stock-Based Compensation," which
permits entities to expense the fair value of stock-based awards, as measured on
the date of grant, over their vesting period. Alternatively, FASB No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the fair-value-
based method defined in FASB No. 123 had been applied. The Corporation has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of FASB No. 123.
Trust assets
Assets held by the Corporation's subsidiaries in fiduciary or agency capacity
for customers are not included in the consolidated financial statements as such
items are not assets of the Corporation or its subsidiaries.
New accounting standard
The Financial Accounting Standards Board issued Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which requires an entity to recognize the financial and servicing
assets it controls and the liabilities it has incurred and to derecognize
financial assets when control has been surrendered in accordance with the
criteria provided in the Statement. The Corporation will apply the new rules
prospectively to transactions beginning in the first quarter of 1997. Based on
current circumstances, management believes the application of the new rules will
not have a material impact on the financial condition or results of operations
of the Corporation.
<PAGE>
2. Business Combinations
Information relating to mergers and acquisitions for which stock was issued for
the three year period ended December 31, 1996, includes:
<TABLE>
<CAPTION>
Merger Common Assets Method of
Date Shares Issued Acquired Accounting
<S> <C> <C> <C> <C>
DuQuoin Bancorp, Inc., DuQuoin, Illinois May 17, 1996 524,160 $ 84,357 Pooling*
Southern Finance Co., Inc., Madisonville, Kentucky December 1, 1995 33,529 2,432 Pooling*
Service Financial, Inc., Harriman, Tennessee December 1, 1995 38,917 1,924 Pooling*
UF Bancorp, Inc., Evansville, Indiana August 4, 1995 2,488,718 564,755 Pooling
Bank of Orleans, Indiana August 4, 1995 351,141 58,576 Pooling*
Harrisburg Bancshares, Inc., Harrisburg, Illinois February 10, 1995 529,569 110,467 Pooling
King City Federal Savings Bank, Mt. Vernon, Illinois February 1, 1995 719,322 176,494 Pooling
Citizens Realty & Insurance, Inc., Evansville, Indiana December 1, 1994 459,495 4,943 Pooling
Oakland City Bancshares Corp., Oakland City, Indiana August 30, 1994 174,057 31,875 Pooling*
Union Bank & Trust Co., Morganfield, Kentucky July 1, 1994 491,101 62,412 Pooling*
</TABLE>
Certain of the above entities have had their name changed and/or have been
merged into other subsidiaries of the Corporation.
* Accounted for as a pooling of interests without restatement of prior periods
as the amounts involved were not material to the Corporation's financial
results.
UF Bancorp's and King City's results of operations and cash flows included in
the financial statements for 1994 are for the year ended June 30, 1994, since
these entities were on a June 30 fiscal year. As a result of changing fiscal
years from June 30 to December 31, retained earnings have been reduced by $6,800
attributable to their net losses for the six months ended December 31, 1994, and
by an additional $438 for dividends paid by UF Bancorp during this same period.
Revenues and expenses for this six-month period totaled $18,719 and $22,971,
respectively, for UF Bancorp, and $5,451 and $7,999, respectively for King City.
Also as a result of the change in fiscal years, common stock and surplus were
increased by $19 and $534, respectively, due to the exercise of stock options.
On May 31, 1996, the Corporation acquired $11,785 of loans from 12 offices of
Money One Credit Company, acquired a portion of the customer base from
Evansville Insurance Group and purchased Small Parker & Blossom, Inc., a third
party administrator of employee benefit plans. Goodwill resulting from these
acquisitions totaled approximately $6,375 and is being amortized on a straight-
line basis not exceeding 15 years. These acquisitions were accounted for under
the purchase method of accounting, and accordingly, the consolidated financial
statements include the assets and liabilities and results of operations from the
May 31, 1996 transaction date forward. Pro forma disclosures of the effects of
these acquisitions have not been presented as the amounts involved in these
transactions were not material to the Corporation's financial results.
On August 4, 1995, a subsidiary of the Corporation, Citizens Bank of Western
Indiana, acquired the four Indiana offices of Household Bank, f.s.b., a
subsidiary of Household International and assumed deposit liabilities of
$78,897. Goodwill of $5,345 is being amortized on a straight-line basis over 15
years. The acquisition was accounted for under the purchase method of accounting
and, accordingly, the consolidated financial statements include the assets and
liabilities and results of operations from the August 4, 1995, transaction date
forward.
On February 14, 1997, the Corporation issued 718,867 shares of its common
stock in exchange for all of the outstanding shares of BMC Bancshares, Inc.
(BMC), parent company for Bank of Mt. Carmel, Mt. Carmel, Illinois. At December
31, 1996, BMC had total assets and shareholders' equity of $100,042 and $13,421,
respectively. The acquisition was accounted for under the pooling of interests
method of accounting. The financial information contained herein does not
reflect the February 1997 merger. Pro forma unaudited results of operations
assuming the merger with BMC had occurred on January 1, 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net interest income $148,929 $136,585 $124,376
Net income 37,581 36,851 31,742
Net income per share 1.88 1.86 1.61
</TABLE>
<PAGE>
3. Mortgage Banking Activities
The Corporation has sold certain loans to various investors while retaining
servicing rights. Loans serviced for others totaled $878,593 and $710,634 at
December 31, 1996 and 1995, respectively, and are not included in the
accompanying consolidated financial statements.
Effective January 1, 1995, the Corporation adopted Financial Accounting
Standards Board Statement No. 122, "Accounting for Mortgage Servicing Rights"
which requires the recognition of originated mortgage servicing rights as
assets. Changes in originated mortgage servicing rights for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at January 1, $ 589
Originated mortgage servicing rights 3,330 $ 612
Amortization (550) (23)
Balance at December 31, $ 3,369 $ 589
The components of mortgage banking revenue are as follows:
1996 1995 1994
Income from the sale of mortgages $ 1,843 $1,796 $1,429
Gain on securitization of mortgage loans 4,914
Gain on sale of mortgage servicing rights 2,600 3,226
Mortgage loan fees 1,051 918 1,545
Mortgage servicing fees, net of amortization 2,256 2,348 2,913
Mortgage banking revenue $10,064 $7,662 $9,113
</TABLE>
<PAGE>
4. Investment Securities Available For Sale and Held to Maturity
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for Sale at December 31, 1996:
U.S. Treasury $ 751 $ 1 $ 752
Federal agencies:
Bonds and notes 210,004 599 $ (625) 209,978
Mortgage-backed securities 987,591 3,782 (6,769) 984,604
Collateralized mortgage obligations 70,419 766 (515) 70,670
State and municipal 51,661 1,096 (183) 52,574
Other securities 25,431 81 (131) 25,381
Total $1,345,857 $ 6,325 $ (8,223) $1,343,959
Held to Maturity at December 31, 1996:
Federal agencies:
Mortgage-backed securities $ 105,319 $ 107 $ (2,183) $ 103,243
Collateralized mortgage obligations 2,570 (33) 2,537
State and municipal 140,199 3,726 (555) 143,370
Total $ 248,088 $ 3,833 $ (2,771) $ 249,150
Available for Sale at December 31, 1995:
U.S. Treasury $ 22,832 $ 215 $ (42) $ 23,005
Federal agencies:
Bonds and notes 159,834 1,673 (44) 161,463
Mortgage-backed securities 611,290 5,456 (1,545) 615,201
Collateralized mortgage obligations 109,050 2,093 (3,013) 108,130
State and municipal 40,523 1,259 (78) 41,704
Other securities 22,918 57 (158) 22,817
Total $ 966,447 $10,753 $ (4,880) $ 972,320
Held to Maturity at December 31, 1995:
Federal agencies:
Bonds and notes $ 4 $ 4
Mortgage-backed securities 116,522 $ 144 $ (1,387) 115,279
Collateralized mortgage obligations 3,203 7 (28) 3,182
State and municipal 78,511 3,488 (498) 81,501
Total $ 198,240 $ 3,639 $ (1,913) $ 199,966
</TABLE>
Net unrealized gains or (losses) on investment securities available for
sale, net of tax, at December 31, 1996 and 1995, were ($1,126) and $3,634,
respectively. The amortized cost of investment securities at December 31, 1996,
by contractual maturity, except for mortgage-backed securities and
collateralized mortgage obligations which are based on estimated average lives,
are shown in the following table. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Maturities and Average Yields of Investment Securities Available For Sale at
December 31, 1996*
<TABLE>
<CAPTION>
1 Year or Less 1-5 Years 5-10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 752 6.01% $ 752 6.01%
Federal agencies:
Bonds and notes $ 640 5.08% 136,247 6.89 $70,791 6.95% $2,300 7.75% 209,978 6.91
Mortgage-backed
securities 216,613 6.95 492,302 6.93 272,107 6.91 3,582 6.89 984,604 6.93
Collateralized mortgage
obligations 21,908 6.87 45,228 6.82 3,130 5.82 404 5.73 70,670 6.78
State and municipal 6,743 9.44 18,569 10.08 3,243 8.94 24,019 7.87 52,574 8.92
Other securities 798 8.09 554 6.47 239 5.87 23,790 6.21 25,381 6.27
Total $246,702 7.01% $693,652 7.00% $349,510 6.93% $54,095 7.05% $1,343,959 6.98%
Percent of total 18% 52% 26% 4% 100%
</TABLE>
Maturities and Average Yields of Investment Securities Held to Maturity at
December 31, 1996*
<TABLE>
<CAPTION>
1 Year or Less 1-5 Years 5-10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agencies:
Mortgage-backed
securities $ 26,159 6.38% $ 59,583 6.35% $ 19,176 6.15% $ 401 6.15% $ 105,319 6.32%
Collateralized mortgage
obligations 598 5.41 1,972 5.44 2,570 5.43
State and municipal 514 7.76 19,594 8.90 37,931 8.25 82,160 7.92 140,199 8.15
Total $ 27,271 6.38% $ 81,149 6.94% $ 57,107 7.54% $ 82,561 7.91% $ 248,088 7.34
Percent of total 11% 33% 23% 33% 100%
</TABLE>
*Fully taxable equivalent yields
Investment securities with a carrying value of $626,647 and $523,265 were
pledged at December 31, 1996 and 1995, respectively, to secure securities sold
under repurchase agreements, public deposits, trust funds and for other purposes
as required or permitted by law.
Proceeds from the sales of investment securities available for sale during
1996, 1995 and 1994 were $596,755, $282,804 and $178,774, respectively. Gross
gains and losses, respectively, realized on those transactions were as follows:
1996 - $2,573 and ($1,095); 1995 - $3,608 and ($1,443); and 1994 - $1,919 and
($1,232).
On December 1, 1995, the Corporation transferred certain securities from
held to maturity to available for sale in accordance with a transition
reclassification allowed by the Financial Accounting Standards Board. Such
securities had a carrying value of $375,027 and a fair value of $374,716. In
February 1995, $22,492 of investment securities were transferred from held to
maturity to available for sale. This reclassification was necessitated to
conform the investment portfolios of acquired institutions to the Corporation's
policy for credit risk and interest rate risk.
<PAGE>
5. Loans and Allowance for Loan Losses
Through its subsidiaries, the Corporation generates commercial, mortgage and
consumer loans from customers located in its primary market areas of Indiana,
Illinois, Kentucky, and portions of Tennessee. Collateral, if deemed necessary,
is based on management's credit evaluation and may include business assets of
commercial borrowers as well as personal property and real estate of individual
borrowers or guarantors. The Corporation's loan portfolio is diversified with no
major concentration related to any one industry.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Loans outstanding at December 31:
Commercial, industrial and agricultural production $ 651,862 $ 555,571
Tax exempt 21,689 23,354
Real estate mortgage:
Commercial and agricultural 171,715 136,941
Construction 67,428 48,690
Residential 721,612 665,986
Consumer 598,507 553,935
2,232,813 1,984,477
Less: Unearned interest 13,162 13,023
Allowance for loan losses 30,312 28,806
Loans, net of unearned interest and allowance for loan losses $2,189,339 $1,942,648
</TABLE>
Impaired loans totaled $18,122 and $14,149 at December 31, 1996 and 1995,
respectively. An allowance for losses was not deemed necessary for impaired
loans totaling $10,702 and $6,701 at December 31, 1996 and 1995, respectively.
At December 31, 1996, an allowance of $1,653 was recorded for the remaining
balance of impaired loans of $7,420. At December 31, 1995, an allowance of
$1,212 was recorded for the remaining $7,448. Impaired loans averaged $15,281
and $13,566 for 1996 and 1995, respectively. Interest income and cash receipts
of interest totaled $178 and $38, respectively, during the period in 1996 that
the loans were impaired. For 1995, interest income and cash receipts amounted to
$76 and $102, respectively.
Loans on which the accrual of interest was discontinued or reduced amounted
to $21,142 at December 31, 1996, and $20,861 at December 31, 1995. Additional
interest income of approximately $1,677 for 1996, $1,626 for 1995, and $908 for
1994, would have been recorded had income on these loans been accounted for on
the accrual basis.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Allowance for loan losses:
Balance at January 1, $ 28,806 $ 28,502 $ 23,443
Allowance of subsidiaries at acquisition date 1,872 769 1,118
Adjustment to conform year-ends 561
Loan charge-offs (12,865) (9,494) (5,633)
Loan recoveries 3,293 2,090 1,779
Provision for loan losses 9,206 6,939 7,234
Balance at December 31, $ 30,312 $ 28,806 $ 28,502
6. Premises and Equipment
1996 1995
Cost at December 31:
Land $ 9,938 $ 8,742
Buildings and leasehold improvements 76,243 71,651
Equipment 48,877 42,700
Total cost 135,058 123,093
Accumulated depreciation (64,610) (56,869)
Net $ 70,448 $ 66,224
7. Deposits
1996 1995
Deposits at December 31:
Non-interest bearing checking $ 354,529 $ 322,706
Interest bearing checking 410,693 414,315
Money market savings 319,660 301,637
Other savings 227,989 237,109
Certificates of $100 or more 226,600 109,828
Other certificates and time deposits 1,490,756 1,404,394
Total $3,030,227 $2,789,989
</TABLE>
The Corporation receives deposits from customers located in its primary
market areas of Indiana, Illinois, and Kentucky, and generally does not accept
brokered deposits and has no significant concentrations of deposits from any one
customer or industry. The maturity distribution of certificates and other time
deposits at December 31, 1996, was as follows: 1997 - $1,085,295; 1998 -
$394,146; 1999 - $132,677; 2000 - $48, 126; 2001 - $24,713; 2002 and after -
$32,399.
Interest expense on time deposits of $100 or more was $9,456, $7,540 and
$4,556 for 1996, 1995 and 1994, respectively.
<PAGE>
<TABLE>
<CAPTION>
8. Short-Term Borrowings
<S> <C> <C> <C> <C> <C> <C>
Securities
Sold Under Federal Other
Repurchase Funds Short-Term
1996 Agreements Purchased Borrowings Total
Balance at December 31 $530,261 $21,730 $ 7,878 $559,869
Average amount outstanding during the year 406,678 42,717 6,105 455,500
Maximum amount outstanding at any month-end 530,261 93,850 16,252
Weighted average interest rate:
During year 5.12% 5.39% 4.46% 5.14%
End of year 5.02 5.75 4.76 5.05
1995
Balance at December 31 $325,271 $18,370 $ 7,441 $351,082
Average amount outstanding during the year 302,004 23,539 7,600 333,143
Maximum amount outstanding at any month-end 338,174 42,790 14,136
Weighted average interest rate:
During year 5.52% 5.92% 5.57% 5.55%
End of year 5.15 5.50 4.88 5.16
1994
Balance at December 31 $319,965 $27,000 $ 9,938 $356,903
Average amount outstanding during the year 213,963 30,669 6,633 251,265
Maximum amount outstanding at any month-end 329,249 50,335 13,520
Weighted average interest rate:
During year 4.61% 4.33% 3.95% 4.56%
End of year 5.48 6.23 5.14 5.53
The maturity distribution of securities sold under repurchase agreements at
December 31, 1996, was as follows:
Overnight $106,949
1-30 days 383,408
30-90 days 20,212
Over 90 days 19,692
$530,261
</TABLE>
The market value of securities sold under repurchase agreements totaled
$536,745. Those securities were under the Corporation's control.
<TABLE>
<CAPTION>
9. Long-Term Debt
1996 1995
<S> <C> <C>
Long-term debt of the parent company and its subsidiaries as of December 31:
Parent Company:
Convertible subordinated debentures, 7.50%, redemptions of $1,125
annually beginning in 2001, balance due 2011 $ 6,029 $ 6,538
Redeemable subordinated debentures, 9.50%, redeemed August 1996 2,187
Notes payable, unsecured:
9.81%, payable $600 annually through 1996, balance due in 1997 2,400 3,000
Variable rate adjusted with changes in LIBOR, payable $250 quarterly through
2000 (6.16% and 6.69% at December 31, 1996 and 1995, respectively) 4,500 5,500
Subsidiaries:
Federal Home Loan Bank advances, due at various dates through 2016 (weighted
average rates of 5.56% and 5.89% at December 31, 1996 and 1995, respectively) 158,640 115,794
Variable rate revolving credit agreement, secured by finance receivables
adjusted with changes in LIBOR, 6.63% at December 31, 1995, paid in 1996 19,851
Other, including capitalized leases 5,161 5,176
Total $176,730 $158,046
</TABLE>
The scheduled principal reduction of long-term debt at December 31, 1996,
was as follows: 1997 - $13,721; 1998 - $77,016; 1999 - $51,257; 2000 - $11,681;
2001- $11,318; 2002 and after - $11,737. Certain notes payable permit earlier
principal payments without penalty.
The Corporation sold $15,000 of 7.5 percent convertible subordinated
debentures on August 29, 1991. The debentures are convertible into shares of
common stock of the Corporation at a conversion price of $17.99 per share,
subject to certain adjustments, any time prior to maturity. The debentures are
subject to equal annual redemptions of $1,125 commencing in 2001 with final
maturity on September 1, 2011. The Corporation has the option to redeem the
debentures in whole or in part under certain conditions prior to maturity.
The redeemable subordinated debentures, redeemed August 15, 1996, were
issued in tandem with a like face amount of cancelable mandatory stock purchase
contracts as described in Note 10.
Qualifying, unencumbered mortgage assets equal to at least 170 percent of
the aggregate amount of advances and Federal Home Loan Bank stock have been
pledged as collateral for the Federal Home Loan Bank advances.
The Corporation has an unsecured line of credit available which permits it
to borrow up to $20,000 at variable rates adjusted with changes in LIBOR through
December 31, 1997. At December 31, 1996, $20,000 remained available for future
use.
<PAGE>
10. Shareholders' Equity
The Corporation is authorized to issue 2,000,000 shares of preferred stock, no
par value, which remain unissued. In the event any preferred shares are issued,
specific voting powers, dividend preferences, and other rights and restrictions
of the preferred stock will be designated by the Board of Directors.
Shareholders' equity has been adjusted to record the one-for-ten stock
dividend declared on October 18, 1994 and one-for-twenty stock dividends
declared on October 18, 1995 and September 10, 1996. All share data has been
adjusted to reflect the stock dividends.
The Corporation offers a Dividend Reinvestment and Stock Purchase Plan (the
Plan), which provides shareholders of the Corporation with a convenient method
of purchasing additional shares of common stock. At December 31, 1996, there
were 683,332 shares of common stock reserved for issuance under the Plan. Shares
distributed pursuant to the Plan totaled 131,992, 119,863, and 102,189 for 1996,
1995 and 1994, respectively.
In connection with its merger with Indiana Bancshares, Inc., the
Corporation reserved 172,392 shares of its common stock effective May 1, 1992,
for issuance pursuant to Indiana Bancshares' $2,500 cancelable mandatory stock
purchase contracts, which were assumed by the Corporation. The cancelable
mandatory stock purchase contracts were called effective August 15, 1996. The
Corporation issued 144,371 shares in 1996, 5,515 shares in 1995 and 414 shares
in 1994, in connection with the exercise of these stock purchase contracts.
The Corporation had reserved 335,206 shares of its common stock at December
31, 1996, for its convertible subordinated debentures as described in Note 9.
The Corporation has Incentive Stock Option Plans (Plans), whereby up to
771,750 shares of common stock can be granted to directors, officers or
employees of the Corporation or its subsidiaries. Under terms of the Plans,
options may be granted to purchase the Corporation's common stock at a price not
less than the fair market value of the common stock at the date of the grant,
for a period of up to 10 years after a six month vesting period. Options granted
pursuant to the Plans are intended to qualify as incentive stock options;
however, certain conditions may be waived which would result in the options
being treated as non-qualified stock options. Unless earlier terminated by the
Board of Directors, the Plans will terminate on March 20, 2005. At December 31,
1996, 471,536 shares were available for the granting of additional options.
Pro forma information regarding net income and earnings per share is
required by the Financial Accounting Standards Board Statement No. 123
"Accounting for Stock-Based Compensation", and has been determined as if the
Corporation had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free interest
rates of 6.83 percent and 6.06 percent; divided yields of 3.2 percent;
volatility factors of the expected market price of the Corporation's common
stock of .14 and .16; and a weighted-average expected life of the options of 7
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, if the estimated fair value of the
options is amortized to expense over the options' vesting period, the effect on
net income would be:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income:
As reported $37,694 $35,651
Pro forma 37,101 35,205
Net income per share:
As reported $ 1.96 $ 1.86
Pro forma 1.93 1.84
</TABLE>
The following table presents share data related to the Plans and other options
assumed by the Corporation as a result of certain mergers:
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average
Option Option Option Option Option Option
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 521,094 $ 20.21 601,557 $14.62 464,012 $12.27
Granted or assumed 167,900 26.89 132,315 26.90 175,500 19.98
Exercised (102,935) 9.14 (209,988) 8.31 (37,955) 10.62
Expired (2,790) 26.29
Outstanding at December 31, 586,059 $ 24.07 521,094 $20.21 601,557 $14.62
Exercisable at December 31, 523,145 $ 23.80 409,344 $20.59 487,965 $13.92
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged
from $6.64 to $31.75. The weighted-average remaining contractual life of those
options was 7.7 years.
<PAGE>
11. Employee Benefit Plans
The Corporation and its subsidiaries maintain noncontributory, defined-
benefit pension plans covering substantially all employees. Pension benefits are
generally based on years of service and compensation, as defined. Pension
expense was $628, $327 and $288 for 1996, 1995 and 1994, respectively, and
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service costs-benefits earned during the period $ 1,728 $ 1,339 $ 1,282
Interest costs on projected benefit obligation 2,286 2,096 1,980
Return on plan assets (3,204) (2,884) (2,750)
Net amortization and deferral (182) (224) (224)
Net pension expense $ 628 $ 327 $ 288
</TABLE>
It is the Corporation's policy to make contributions to the plans that meet
or exceed the minimum funding requirements of applicable laws and regulations,
up to that allowable by federal tax regulations.
The following table sets forth the plans' funded status and the amounts
recognized in the Corporation's consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
Actuarial present value of accumulated benefit obligation:
<S> <C> <C> <C>
Vested $ 27,805 $ 24,771 $ 20,993
Nonvested 545 1,861 725
Total $ 28,350 $ 26,632 $ 21,718
Plan assets at fair value, primarily marketable securities $ 43,684 $ 37,477 $ 30,082
Actuarial present value of projected benefit obligation (33,502) (31,679) (26,108)
Excess of plan assets over projected benefit obligation 10,182 5,798 3,974
Unrecognized net transition asset (1,571) (1,778) (1,966)
Unrecognized net loss (gain) (2,168) 1,750 2,308
Unrecognized prior service cost (957) (981) (1,005)
Prepaid pension expense included in other assets $ 5,486 $ 4,789 $ 3,311
Assumptions used in determining the projected benefit obligations and net
pension expense were:
1996 1995 1994
Discount rate 7.50% 7.50% 8.25%
Rate of increase in compensation levels 4.25 4.25 4.25
Expected long-term rate of return on plan assets 9.00 9.00 9.00
</TABLE>
The discount rate was reduced in 1995 due to changes in market interest
rates. The projected benefit obligation increased by approximately $2,850 in
1995 as a result of this change.
The Corporation and its subsidiaries also have a deferred income savings
plan (Savings Plan) with substantially all employees eligible to participate. At
the discretion of the Board of Directors, the subsidiaries match a percentage of
employee contributions and may make an additional contribution based on earnings
performance. The Corporation's expense for the Savings Plan was $991, $842 and
$1,052 for 1996, 1995 and 1994, respectively.
The Corporation does not provide postretirement benefits other than
pensions nor does it have any material liabilities for postemployment benefits
provided to former and inactive employees.
<TABLE>
<CAPTION>
12. Income Taxes
1996 1995 1994
<S> <C> <C> <C>
Income taxes:
Currently payable:
Federal $16,052 $17,926 $15,504
State 3,918 4,118 3,778
Deferred (benefit):
Federal (250) (1,149) (2,206)
State (197) (185) (283)
Total income taxes $19,523 $20,710 $16,793
1996 1995 1994
Reconciliation of federal statutory tax to actual income tax expense:
Federal income tax at applicable statutory rate (35%) $20,026 $19,726 $16,557
Tax exempt interest (2,979) (2,094) (2,070)
State franchise tax, net of federal tax benefit 2,419 2,556 2,271
Other 57 522 35
Income tax expense $19,523 $20,710 $16,793
Effective rate 34% 37% 35%
</TABLE>
Net deferred tax assets are included in other assets. No valuation
allowance was required as of December 31, 1996, 1995 or 1994 due to management's
belief that it is more likely than not that future operations will generate
sufficient taxable income to realize the deferred tax assets. The components of
the deferred tax asset at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Unrealized (gains) losses on securities available for sale $ 772 $(2,239) $ 5,175
Differences in depreciation methods (3,984) (2,902) (2,507)
Differences in accounting for loan losses 8,949 6,553 5,010
Deferred compensation and pension (1,716) (1,506) (738)
Difference in accounting for warranty losses on sold loans 712 1,108 1,002
Other 405 666 (182)
Net deferred tax asset $ 5,138 $ 1,680 $ 7,760
Assets $ 17,586 $10,878 $11,468
Liabilities (12,448) (9,198) (3,708)
Net deferred tax asset $ 5,138 $ 1,680 $ 7,760
</TABLE>
<PAGE>
13. Commitments and Contingent Liabilities
The Corporation is committed under various operating leases for premises and
equipment used in its banking operations. Future minimum rentals for lease
commitments having initial or remaining non-cancelable lease terms in excess of
one year totaled $7,653 at December 31, 1996. Rental expense for operating
leases totaled $1,825, $1,469 and $1,666 in 1996, 1995 and 1994, respectively.
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying consolidated financial
statements. The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the contractual
or notional amount of those instruments. The Corporation uses the same credit
policies in making such commitments as it does for instruments that are included
in the consolidated balance sheet.
At December 31, those financial instruments whose contract amount represents
credit and/or interest rate risk are summarized in the following table:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commitments to extend credit $571,710 $510,824
Standby letters of credit 43,070 25,205
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation. Collateral held may include accounts receivable,
inventory, real property, plant and equipment and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
The Corporation and its subsidiaries are also subject to claims and lawsuits
which arise primarily in the ordinary course of business. Based on information
presently available and advice received from legal counsel representing the
Corporation in connection with such claims and lawsuits, it is the opinion of
management that the disposition or ultimate determination of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Corporation.
The Corporation has change of control agreements with certain employees which
provide for the continuation of salary and certain benefits for a specified
period of time under certain conditions. The contingent liability under these
agreements in the event of a change in control is approximately $3,012. The
Corporation is not required to pay any amounts under these agreements which
cannot be deducted for federal income tax purposes.
The Corporation has entered into an agreement with a third party to provide
the Corporation with certain services, including software, specified computer
equipment and the overall management and operations of its data processing
through June 2003. The agreement provides for minimum annual payments as
follows: 1997 - $4,675; 1998 - $4,675; 1999 - $4,607; 2000 - $4,519; 2001 -
$4,519; 2002 - $4,519; and 2003 - $2,259.
14. Interest Rate Contracts
Through the purchase of interest rate cap agreements (caps), the Corporation has
reduced the impact of increased interest rates on its costs to acquire certain
deposits, repurchase agreements and long-term borrowings being hedged. These
caps entitle the Corporation to receive periodic payments from counterparties
based upon the notional amount of the caps and the excess of the index rate over
the strike price.
At December 31, 1996 and 1995, the notional amount of the interest rate caps
was $285,000 and $135,000, respectively. The caps are indexed to LIBOR with
contract strike prices ranging from 4 percent to 7 percent and mature prior to
1999. The caps had a carrying value of $1,753 and $1,495 at December 31, 1996
and 1995, respectively, and related market values of $934 and $753.
The Corporation has entered into interest rate swaps as a hedge against
certain long-term borrowings to manage its interest rate sensitivity. The
contracts represent an exchange of interest payments and the underlying
principal balances of the liabilities are not affected. At December 31, 1996 and
1995, the Corporation had swaps with a notional value of $55,000 and $10,000,
respectively. The agreements require the Corporation to pay a fixed rate of
interest ranging from 5.77% to 6.12% and receive a variable rate based on three-
month LIBOR. The agreements terminate on or prior to January 12, 2001.
The Corporation is exposed to losses if a counterparty fails to make its
payments under a contract in which the Corporation is in a receiving status.
Although collateral or other security is not obtained, the Corporation minimizes
its credit risk by monitoring the credit standing of the counterparties and
anticipates that the counterparties will be able to fully satisfy their
obligation under the agreements.
At December 31, 1996, option forward contracts, if exercised, committed the
Corporation to sell $100,219 par value of mortgage-backed securities at prices
not less than their carrying values during the first quarter of 1997. Fees
received from these contracts have been deferred until expiration, termination
or exercise of the contract.
<PAGE>
15. Related Party Transactions
In the ordinary course of business, the Corporation has loan, deposit and other
transactions with officers, directors and principal shareholders, and with
organizations and individuals with which they are financially or otherwise
closely associated. All of the transactions were entered into on substantially
the same terms as those prevailing at the time for comparable transactions with
other parties. These loans do not involve more than normal risk of
collectibility or present other unfavorable features. As defined, total loans to
executive officers, directors and principal shareholders were as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1996 $ 36,631
New loans, including renewals 19,017
Director and officer changes 2,029
Payments, including renewals (22,063)
Balance at December 31, 1996 $ 35,614
</TABLE>
16. Regulatory Restrictions and Capital Requirements
The principal source of income and funds for the Corporation (Parent Company) is
dividends from its banking subsidiaries. During 1997, the amount of dividends
that the banking subsidiaries can pay to the Corporation without obtaining prior
regulatory approval is limited to the total of their 1997 net income and $35,951
(the amount available at December 31, 1996). As a practical matter, the banks
may restrict dividends to a lesser amount because of the need to maintain
adequate capital structures.
The banking subsidiaries are required to maintain non-interest bearing cash
reserve balances which are dependent on the amounts and types of deposits held
by the banks. The reserves required at December 31, 1996, were $16,253.
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and its banking subsidiaries must meet
specific capital guidelines that involve quantitative measures of their
respective assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's and its banking
subsidiaries' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its banking subsidiaries to maintain minimum amounts
and ratios (set forth in the following table) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes, that
as of December 31, 1996, the Corporation and its banking subsidiaries meet all
capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from regulatory
agencies categorized the subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the subsidiary banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the subsidiary banks' categories.
The Corporation's and significant subsidiary banks' actual and minimum
required capital amounts and ratios as mandated by the Federal Reserve Board at
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Requirements
To be Classified
Actual Minimum Requirements as "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-weighted assets):
Corporation $322,141 13.11% $196,519 8.00% $245,649 10.00%
The Citizens National Bank of Evansville 149,123 12.31 96,918 8.00 121,148 10.00
Citizens Bank of Kentucky 50,253 12.95 31,035 8.00 38,793 10.00
Citizens Bank of Central Indiana 39,654 10.97 28,914 8.00 36,143 10.00
Citizens Bank of Illinois, N.A. 39,100 13.53 23,112 8.00 28,890 10.00
Tier I Capital (to risk-weighted assets):
Corporation 285,800 11.63 98,260 4.00 147,390 6.00
The Citizens National Bank of Evansville 136,133 11.24 48,459 4.00 72,689 6.00
Citizens Bank of Kentucky 45,394 11.70 15,517 4.00 23,276 6.00
Citizens Bank of Central Indiana 35,499 9.82 14,457 4.00 21,686 6.00
Citizens Bank of Illinois, N.A. 35,479 12.28 11,556 4.00 17,334 6.00
Tier I Capital (to average assets):
(also known as leverage ratio)
Corporation 285,800 7.20 158,847 4.00 198,559 5.00
The Citizens National Bank of Evansville 136,133 6.99 77,877 4.00 97,346 5.00
Citizens Bank of Kentucky 45,394 6.97 26,068 4.00 32,585 5.00
Citizens Bank of Central Indiana 35,499 5.70 24,895 4.00 31,119 5.00
Citizens Bank of Illinois, N.A. 35,479 6.78 20,941 4.00 26,177 5.00
</TABLE>
<PAGE>
17. Fair Values of Financial Instruments
The estimated fair values of the Corporation's financial instruments are
provided in the following table. A financial instrument is defined as cash,
evidence of an ownership interest in an entity, or a contract that both: a)
Imposes on one entity a contractual obligation to deliver cash or another
financial instrument to a second entity or, b) Conveys to a second entity a
contractual right to receive cash or another financial instrument from the first
entity. All of the Corporation's assets and liabilities are not financial
instruments, as defined, and are therefore not included in the table.
The estimated fair values of the Corporation's financial instruments at
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 145,357 $ 145,357 $ 138,785 $ 138,785
Investment securities available for sale 1,343,959 1,343,959 972,320 972,320
Investment securities held to maturity 248,088 249,150 198,240 199,966
Net loans (including loans held for sale) 2,195,796 2,220,863 2,164,805 2,221,413
Interest receivable 30,013 30,013 29,353 29,353
Financial liabilities:
Deposits (3,030,738) (3,034,721) (2,790,020) (2,791,682)
Short-term borrowings (561,103) (561,103) (352,435) (352,435)
Interest rate contracts 1,753 934 1,495 753
Long-term debt (176,738) (177,081) (158,157) (158,209)
Interest payable (16,837) (16,837) (15,624) (15,624)
Off-balance sheet financial assets (liabilities):
Commitments to extend credit 2,780 2,402
Interest rate swaps (363) (134)
</TABLE>
The carrying amounts of cash and cash equivalents are reasonable estimates
of their fair values. Fair values for investment securities were based on quoted
market prices or dealer quotes where available. The fair values of investment
securities, where market values or dealer quotes were not available, and loans
were calculated by discounting expected cash flows to average maturities. The
discount rate was adjusted to allow for varying repricing opportunities, credit
risks and carrying costs, as deemed appropriate by management. The fair values
of demand deposits, savings accounts, money market deposits and short-term
borrowings are the carrying amounts which were payable on December 31, 1996, and
December 31, 1995, respectively. Fair values of interest rate contracts,
including interest rate swaps, were based on dealer quotes. The fair values of
fixed-maturity certificates of deposit and long-term debt were estimated using
current interest rates for similar remaining maturities. Commitments to make
loans and standby letters of credit are not recorded on the consolidated balance
sheet. The fair values of commitments to extend credit are based on fees
currently charged to enter into similar agreements with similar maturities and
interest rates.
Because no active market exists for a significant portion of the
Corporation's financial instruments, fair value estimates were based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
such factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision.
<PAGE>
18. Condensed Financial Information of Parent Company
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Corporation (Parent Company only).
<TABLE>
<CAPTION>
December 31,
Condensed Balance Sheet 1996 1995
<S> <C> <C>
Assets
Cash on deposit with subsidiaries $ 893 $ 2,236
Securities purchased under repurchase agreements with subsidiaries 8,000 10,000
Total cash and cash equivalents 8,893 12,236
Investment in subsidiaries 314,766 287,958
Premises and equipment 1,282 732
Receivables from subsidiaries 11,107
Other assets 3,735 2,508
Total assets $328,676 $314,541
Liabilities
Accrued expenses $ 3,449 $ 1,810
Long-term debt 12,929 15,038
Total liabilities 16,378 16,848
Shareholders' equity 312,298 297,693
Total liabilities and shareholders' equity $328,676 $314,541
Year Ended December 31,
Condensed Statement of Income 1996 1995 1994
Income
Dividends from subsidiaries $ 26,100 $ 46,003 $ 32,057
Management fees from subsidiaries 7,100 5,998 5,673
Other income 1,459 1,151 1,817
Total income 34,659 53,152 39,547
Expenses
Personnel expense 8,679 6,894 5,731
Interest expense 1,327 1,433 1,426
Other expenses 5,419 3,859 3,166
Total expense 15,425 12,186 10,323
Income before income tax benefit and equity
in undistributed earnings of subsidiaries 19,234 40,966 29,224
Income tax benefit 2,962 1,737 938
Income before equity in undistributed earnings of subsidiaries 22,196 42,703 30,162
Equity in undistributed earnings of subsidiaries 15,498 (7,052) 350
Net income $ 37,694 $ 35,651 $ 30,512
Year Ended December 31,
Condensed Statement of Cash Flows 1996 1995 1994
Operating activities:
Net income $ 37,694 $ 35,651 $ 30,512
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 223 143 97
Undistributed net income of subsidiaries (15,498) 7,052 (350)
Increase in other assets (591) (1,900) (123)
Increase in other liabilities 1,639 96 523
Net cash provided by operating activities 23,467 41,042 30,659
Investing activities:
Principal payments received on notes from subsidiaries 14,657 89 1,650
Advances on notes to subsidiaries (11,200) (1,642) (3,077)
Capital contributions (to) from subsidiaries (674) (11,652) 1,952
Purchase of premises and equipment (730) (507) (321)
Net cash provided (used) by investing activities 2,053 (13,712) 204
Financing activities:
Payment of long-term debt (13,810) (19,100) (3,911)
Proceeds from long-term borrowings 12,200 18,000
Proceeds from common stock issued for dividend reinvestment plan 3,560 3,093 2,733
Proceeds from exercise of stock options and stock purchase contracts 1,137 1,964 804
Payment of cash dividends (15,672) (12,972) (11,777)
Purchase and retirement of common stock (16,278) (25,289) (11,693)
Net cash used by financing activities (28,863) (34,304) (23,844)
Net increase (decrease) in cash and cash equivalents (3,343) (6,974) 7,019
Cash and cash equivalents at January 1, 12,236 19,210 12,191
Cash and cash equivalents at December 31, $ 8,893 $ 12,236 $ 19,210
Supplemental disclosure:
Non-cash investing and financing activities:
Stock issued in exchange of debentures and equity contracts $ 2,686 $ 247 $ 3,252
Common stock issued for acquisitions 6,286 6,618 9,969
Capital contribution to subsidiaries 7,650
</TABLE>
<PAGE>
Indpependent Auditors' Report
To the Shareholders and Board of Directors
CNB Bancshares, Inc.
Evansville, Indiana
We have audited the accompanying consolidated balance sheet of CNB Bancshares,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The accompanying
consolidated financial statements of CNB Bancshares, Inc. and subsidiaries as of
and for the two year period ended December 31, 1995, were audited by other
auditors whose report thereon dated January 26, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of CNB
Bancshares, Inc. and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
January 16, 1997
<PAGE>
Management's Statement of Financial Reporting
The consolidated financial statements of CNB Bancshares, Inc. were prepared by
management of the Corporation, which is responsible for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles appropriate in the circumstances and properly include
amounts that are based on management's best judgments and estimates. The other
financial information included in this report is consistent with that in the
financial statements.
In meeting its responsibility, management has established and maintains
systems of internal control which are designed to provide reasonable assurance
that assets are safeguarded and that the financial records reflect the
authorized transactions of the Corporation and that its policies and procedures
are followed. These systems are augmented by the careful selection and training
of qualified personnel and a continuous program of internal audits.
KPMG Peat Marwick LLP, independent auditors, were engaged to audit the
consolidated financial statements of CNB Bancshares, Inc. and to express an
opinion thereon. The audit was conducted in accordance with generally accepted
auditing standards which included a review of the Corporation's systems of
internal controls and such tests and related procedures as they deemed necessary
to express an opinion on the fairness of the consolidated financial statements.
The Board of Directors pursues its responsibility for the Corporation's
financial statements through its Audit Committee. The Audit Committee, comprised
solely of directors who are not officers or employees of the Corporation, is
responsible for monitoring the accounting, auditing and financial reporting
practices of the Corporation and its subsidiaries. The Committee recommends to
the Board of Directors the appointment of the independent auditors and meets
regularly with them, the internal auditors, and management. To further assure
their independence, the internal auditors and the independent auditors have
direct access to the Audit Committee and the Board of Directors.
/s/ James J. Giancola
James J. Giancola
President and Chief Executive Officer
/s/ John R. Spruill
John R. Spruill
Executive Vice President and Chief Financial Officer
/s/ Ralph L. Alley
Ralph L. Alley
Senior Vice President,
Controller and Treasurer
<PAGE>
Shareholder Information
Corporate Offices
The corporate offices of CNB Bancshares are located at:
20 N. W. Third Street, Evansville, Indiana 47739-0001
812-464-3400.
Annual Meeting
The annual meeting of shareholders of CNB Bancshares will be held at 5:00 p.m.
on April 22, 1997, at the Vanderburgh Auditorium, 715 Locust Street, Evansville,
Indiana.
Stock Prices and Dividends
The common stock of CNB trades on the New York Stock Exchange under the symbol
BNK. The table below lists the range of the closing stock price and dividend
information on a quarterly basis over the last two years. All amounts have been
adjusted for stock dividends.
<TABLE>
<CAPTION>
1996
Range of Dividends
Stock Price Declared Paid
<S> <C> <C> <C> <C>
First Quarter $26.67 - $27.97 $.20 $.20
Second Quarter 26.67 - 27.63 .20 .20
Third Quarter 25.95 - 29.50 .20 .20
Fourth Quarter 29.38 - 41.75 .22 .22
$.82 $.82
1995
Range of Dividends
Stock Price Declared Paid
First Quarter $26.53 - $29.03 $.18 $.18
Second Quarter 26.53 - 27.44 .19 .18
Third Quarter 25.63 - 27.20 .19 .19
Fourth Quarter 24.28 - 27.14 .19
$.56 $.74
</TABLE>
Quarterly Dividend Programs
CNB offers a Dividend Reinvestment and Stock Purchase Plan to shareholders. The
Plan provides for automatic quarterly reinvestment of dividends, as well as
optional cash purchases up to $5,000 per month.
The Corporation also offers Direct Deposit of cash dividends, whereby
quarterly dividend payments can be automatically deposited to the shareholder's
designated bank.
For information regarding CNB Bancshares' convenient dividend programs,
contact Kathryn P. Williams, Shareholder Relations Officer.
Transfer Agent
Shareholders should direct inquiries concerning dividend checks or their
shareholder records to:_______
Citizens National Bank of Evansville
Attention: Kathryn P. Williams,
P.O. Box 778, Evansville, Indiana 47705-0778,
812-464-3416.
Internet
In-formation on CNB is available on the Internet at
http://www.citizensonline.com.
Availability of Form 10-K
CNB's annual report to the Securities and Exchange Commission on Form 10-K is
available without charge upon written request. Address such request to Kathryn
P. Williams, Shareholder Relations Officer, at the corporate office address
listed above.
<PAGE>
EXHIBIT NO. 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C>
The Citizens National Bank of Evansville, United States
Indiana
Citizens Trust Company of Indiana, N. A. United States
Small Parker & Blossom, Inc. State of Illinois
Citizens Bank of Kentucky, Madisonville, State of Kentucky
Kentucky
Peoples Security Finance Company, Inc. State of Kentucky
Citizens Banc Leasing, Inc. State of Kentucky
Citizens Bank of Central Indiana, Greenwood, State of Indiana
Indiana
IBI & Associates** General Partnership
HBI Acquisition Company State of Indiana
Citizens Bank of Illinois, N.A., Mt. United States
Vernon, Illinois
Citizens Bank of Western Indiana, Terre State of Indiana
Haute, Indiana
Citizens Bank of Jasper, Indiana State of Indiana
Citizens Realty and Insurance, Inc. State of Indiana
Citizens Information Systems, Inc. State of Indiana
Citizens Life Assurance Company State of Arizona
</TABLE>
*The indention of an entity's name in the table above signifies its
ownership by the entity preceding it.
**IBI & Associates is a general partnership of which the registant has a
75% interest.
<PAGE>
Exhibit 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the below scheduled Form S-8
registration statements of our report dated January 16, 1997, and appearing on
page 60 of the Annual Report to Shareholders, on the consolidated financial
statements of CNB Bancshares, Inc. incorporated by reference in the Annual
Report on Form 10-K for the year ended December 31, 1996.
Commission
File
Number
----------
<TABLE>
<CAPTION>
<S> <C>
Indiana Bancshares, Inc. 1985 Non-Qualified
Stock Option Plan and Indiana Bancshares, Inc.
1990 Stock Option Plan 33-47898
CNB Bancshares, Inc. 1992 Incentive Stock Option Plan 33-45929
Citizens Incentive Savings Plan 33-41514
Valley Bank Stock Option Plan 33-38651
King City Federal Savings Bank 1986 Stock Option and
Incentive Plan 33-89658
King City Federal Savings Bank 1993 Stock Option and
Incentive Plan 33-89722
UF Bancorp, Inc. 1991 Stock Option and Incentive Plan 33-61685
CNB Bancshares, Inc. 1995 Stock Incentive Plan 33-60431
</TABLE>
/s/ KPMG Peat Marwick, LLP
St. Louis, Missouri
March 27, 1997
<PAGE>
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the below scheduled Form S-8
registration statements of our report dated January 26, 1996, and appearing on
page 62 of the Annual Report to Shareholders, on the consolidated financial
statements of CNB Bancshares, Inc. incorporated by reference in the Annual
Report on Form 10-K for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Commission
File
Number
----------
<S> <C>
Indiana Bancshares, Inc. 1985
Non-Qualified Stock Option 33-47898
Plan and Indiana Bancshares, Inc. 1990
Stock Option Plan
CNB Bancshares, Inc. 1992 Incentive 33-45929
Stock Option Plan
Citizens Incentive Savings Plan 33-41514
Valley Bank Stock Option Plan 33-38651
King City Federal Savings Bank 1986
Stock Option and 33-89658
Incentive Plan
King City Federal Savings Bank 1993
Stock Option and 33-89722
Incentive Plan
UF Bancorp, Inc. 1991 Stock Option and 33-61685
Incentive Plan
CNB Bancshares, Inc. 1995 Stock 33-60431
Incentive Plan
</TABLE>
/s/ Geo. S. Olive & Co. LLC
Evansville, Indiana
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from CNB
Bancshares, Inc's Consolidated Balance Sheet as of December 31, 1996 and the
Consolidated Statement of income for the year ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<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> 113,504
<INT-BEARING-DEPOSITS> 203
<FED-FUNDS-SOLD> 31,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,343,959
<INVESTMENTS-CARRYING> 248,088
<INVESTMENTS-MARKET> 249,150
<LOANS> 2,226,108
<ALLOWANCE> 30,312
<TOTAL-ASSETS> 4,117,989
<DEPOSITS> 3,030,227
<SHORT-TERM> 559,869
<LIABILITIES-OTHER> 38,865
<LONG-TERM> 176,730
<COMMON> 19,168
0
0
<OTHER-SE> 293,130
<TOTAL-LIABILITIES-AND-EQUITY> 4,117,989
<INTEREST-LOAN> 198,735
<INTEREST-INVEST> 96,747
<INTEREST-OTHER> 960
<INTEREST-TOTAL> 296,442
<INTEREST-DEPOSIT> 116,606
<INTEREST-EXPENSE> 150,841
<INTEREST-INCOME-NET> 145,601
<LOAN-LOSSES> 9,206
<SECURITIES-GAINS> 1,478
<EXPENSE-OTHER> 134,703
<INCOME-PRETAX> 57,217
<INCOME-PRE-EXTRAORDINARY> 57,217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,694
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 4.17
<LOANS-NON> 19,885
<LOANS-PAST> 3,543
<LOANS-TROUBLED> 1,257
<LOANS-PROBLEM> 9,220
<ALLOWANCE-OPEN> 28,806
<CHARGE-OFFS> 12,865
<RECOVERIES> 3,293
<ALLOWANCE-CLOSE> 30,312
<ALLOWANCE-DOMESTIC> 28,782
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,530
</TABLE>
<PAGE>
Exhibit 99
Independent Auditors' Report
To the Shareholders and
Board of Directors
CNB Bancshares, Inc.
Evansville, Indiana
We have audited the consolidated balance sheet of CNB Bancshares, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 described above present
fairly, in all material respects, the consolidated financial statements of CNB
Bancshares, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years then
ended in conformity with generally accepted accounting principles.
/s/ GEO. S. OLIVE & CO. LLC
GEO. S. OLIVE & CO. LLC
Evansville, Indiana
January 26, 1996
