SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTER PERIOD ENDED
SEPTEMBER 30, 1997
CNB BANCSHARES, INC. 0-11510
(Exact name of registrant as specified in its charter) (Commission file number)
INDIANA 35-1568731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20 N.W. THIRD STREET, EVANSVILLE, INDIANA 47739
(Address of principal executive office) (Zip Code)
(812) 464-3400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
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
----- -----
As of October 31, 1997, there were 20,463,279 outstanding shares, without
par value, of the registrant.
Exhibit index is on page 22.
<PAGE>
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet ..................... 1
Consolidated Statement of Income ............... 2
Consolidated Condensed Statement of
Changes in Shareholders' Equity .............. 3
Consolidated Statement of Cash Flows ........... 4
Notes to Consolidated Financial Statements ..... 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-19
PART II. Other Information ................................... 20
Signatures ............................................................. 21
Exhibit Index .......................................................... 22
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except for share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
ASSETS
- ------
Cash and due from banks $ 96,933 $ 114,469 $ 121,508
Federal funds sold and other short-term money market investments 831 34,628 13,837
-------------- -------------- ---------------
TOTAL CASH AND CASH EQUIVALENTS 97,764 149,097 135,345
Real estate loans held for sale 17,969 6,457 4,754
Investment securities available for sale 1,455,699 1,379,872 1,330,093
Investment securities held to maturity
(Market value $241,538 at September 30, 1997, $249,150 at
December 31, 1996, and $250,338 at September 30, 1996) 237,387 248,088 252,056
Loans, net of unearned income 2,436,103 2,275,089 2,192,945
Less: Allowance for loan losses 34,110 31,262 30,706
-------------- -------------- ---------------
NET LOANS 2,401,993 2,243,827 2,162,239
Premises and equipment 74,263 71,468 70,753
Intangible assets 31,554 32,847 33,426
Interest receivable 29,239 30,863 31,823
Other assets 70,703 54,056 59,829
-------------- -------------- ---------------
TOTAL ASSETS $ 4,416,571 $ 4,216,575 $ 4,080,318
============== ============== ===============
LIABILITIES
- -----------
Deposits:
Non-interest bearing $ 324,059 $ 359,146 $ 322,998
Interest bearing 2,730,385 2,755,584 2,638,577
-------------- -------------- ---------------
TOTAL DEPOSITS 3,054,444 3,114,730 2,961,575
Securities sold under repurchase agreements 656,046 530,261 503,738
Federal funds purchased and other short-term borrowings 76,998 29,608 47,789
FHLB advances and other long-term debt 257,826 176,730 206,282
Interest payable and other liabilities 41,453 39,832 43,657
-------------- -------------- ---------------
TOTAL LIABILITIES 4,086,767 3,891,161 3,763,041
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $1 stated value
Shares authorized: 50,000,000
Shares issued: 20,463,204 at September 30, 1997, 19,887,107 at
December 31, 1996, and 19,974,105 at September 30, 1996 20,463 19,887 19,974
Capital surplus 285,321 271,001 274,241
Retained earnings 19,995 35,779 29,615
Net unrealized gains (losses) on investment securities available for sale 4,025 (1,253) (6,553)
-------------- -------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 329,804 325,414 317,277
-------------- -------------- ---------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 4,416,571 $ 4,216,575 $ 4,080,318
============== ============== ===============
</TABLE>
See notes to consolidated financial statements.
Page 1 of 24
<PAGE>
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except for share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees:
Taxable $ 55,780 $ 49,891 $ 161,830 $ 145,365
Tax exempt 410 359 1,188 1,106
Real estate loans held for sale 433 1,100 724 4,562
Investment securities:
Taxable 24,963 23,757 75,192 65,524
Tax exempt 2,740 2,353 8,162 6,167
Federal funds sold and other short-term
money market investments 126 418 634 1,648
-------------- ----------- ------------- -------------
Total interest income 84,452 77,878 247,730 224,372
INTEREST EXPENSE
Deposits 32,291 30,161 95,860 89,429
Short-term borrowings 8,948 6,511 24,528 16,476
FHLB advances and other long-term debt 3,645 2,975 9,515 8,166
-------------- ----------- ------------- -------------
Total interest expense 44,884 39,647 129,903 114,071
-------------- ----------- ------------- -------------
NET INTEREST INCOME 39,568 38,231 117,827 110,301
Provision for loan losses 2,575 3,171 8,554 6,878
-------------- ----------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 36,993 35,060 109,273 103,423
NON-INTEREST INCOME
Service charges on deposit accounts 3,773 3,376 10,480 9,329
Trust and plan administration fees 2,130 1,811 6,258 4,775
Insurance premiums and commissions 2,023 2,169 6,252 6,046
Mortgage banking revenue 1,935 3,640 4,317 8,681
Non-interest fees on loans 1,472 1,489 4,168 3,998
Investment products fees 978 713 2,714 2,616
Net securities gains 405 134 910 702
Other 3,186 2,783 8,675 5,756
-------------- ----------- ------------- -------------
Total non-interest income 15,902 16,115 43,774 41,903
-------------- ----------- ------------- -------------
NON-INTEREST EXPENSE
Salaries and employee benefits 18,205 18,979 53,483 50,937
Data processing and other services 3,179 3,022 9,156 9,031
Occupancy 2,325 2,302 6,874 6,528
Equipment 1,987 1,863 5,835 5,461
Professional fees 1,106 1,251 3,191 2,979
Advertising and promotion 1,184 1,112 3,132 3,420
Printing and supplies 865 924 2,660 2,761
Postage and freight 877 807 2,589 2,683
SAIF assessment 4,963 4,963
Other 3,930 5,928 11,297 15,526
-------------- ----------- ------------- -------------
Total non-interest expense 33,658 41,151 98,217 104,289
-------------- ----------- ------------- -------------
INCOME BEFORE INCOME TAXES 19,237 10,024 54,830 41,037
Income taxes 6,487 2,946 18,462 13,975
-------------- ----------- ------------- -------------
NET INCOME 12,750 $ 7,078 $ 36,368 $ 27,062
============== =========== ============= =============
NET INCOME PER SHARE $ 0.62 $ 0.34 $ 1.75 $ 1.30
============== =========== ============= =============
AVERAGE COMMON AND EQUIVALENT SHARES OUTSTANDING 20,647,544 21,127,425 20,828,838 20,879,901
============== =========== ============= =============
</TABLE>
See notes to consolidated financial statements.
Page 2 of 24
<PAGE>
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BEGINNING BALANCE $ 325,774 $ 317,030 $ 325,414 $ 311,331
Net income 12,750 7,078 36,368 27,062
Cash dividends declared (4,375) (3,989) (12,908) (11,516)
Issuance of common stock for:
Dividend reinvestment plan 839 1,817 2,635
Stock options exercised 310 78 834 796
Exercise and conversion of stock purchase
contracts and debentures 4,234 2,158 4,615 2,510
Acquisitions 6,286
Other 196
Purchase and retirement of common stock (14,071) (5,174) (31,614) (11,753)
Change in unrealized gains/losses on
investment securities available for sale 5,182 (743) 5,278 (10,270)
----------- --------- ----------- ------------
ENDING BALANCE $ 329,804 $ 317,277 $ 329,804 $ 317,277
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
Page 3 of 24
<PAGE>
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 36,368 $ 27,062
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,726 10,780
Provision for loan losses 8,554 6,878
Amortization of premiums and discounts on securities 2,320 1,280
Net gains on securities (910) (702)
Loans originated for sale (111,335) (50,095)
Proceeds from sale of loans 99,823 67,646
Increase in interest receivable and other assets, net of amortization (17,522) (25,777)
Increase in interest payable and other liabilities 1,621 10,121
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,645 47,193
----------- ----------
INVESTING ACTIVITIES:
Cash and cash equivalents of subsidiaries acquired, net of purchase price 2,869
Proceeds from the maturity of investment securities available for sale 225,384 194,153
Proceeds from the sale of investment securities available for sale 599,242 327,510
Purchase of investment securities available for sale (892,780) (610,497)
Proceeds from the maturity of investment securities held to maturity 10,363 9,411
Purchase of investment securities held to maturity (52,040)
Net increase in loans (169,334) (177,532)
Purchase of premises and equipment (8,298) (7,606)
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES (235,423) (313,732)
----------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (60,806) 5,675
Net increase in short-term borrowings 172,191 196,611
Payment and maturity of long-term debt (72,319) (140,585)
Proceeds of long-term borrowings 158,250 191,200
Cash dividends paid (12,908) (11,516)
Proceeds from common stock issued for dividend reinvestment plan 1,817 2,635
Proceeds from exercise of stock options 834 796
Purchase and retirement of common stock (31,614) (11,753)
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 155,445 233,063
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,333) (33,476)
CASH AND CASH EQUIVALENTS AT JANUARY 1, 149,097 168,821
----------- ----------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, $ 97,764 $ 135,345
=========== ==========
Supplemental disclosure:
Cash paid for:
Interest $ 127,088 $ 113,144
Income taxes 16,363 13,248
Non-cash investing and financing activities:
Common stock issued for acquisitions 6,286
Stock issued in exchange of debentures and equity contracts
and pursuant to employee benefit plans 4,844 2,746
</TABLE>
See notes to consolidated financial statements.
Page 4 of 24
<PAGE>
CNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except for share data)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of CNB
Bancshares, Inc. (Corporation) and its wholly-owned subsidiaries, after
elimination of all material intercompany accounts and transactions.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and do not include all the information and
footnotes required for a complete presentation of consolidated financial
statements. The Corporation's accounting and reporting policies for interim
financial reporting are consistent with those followed for annual financial
reporting. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results of
operations for the periods reported have been included in the foregoing
interim consolidated financial statements. The interim results of operations
presented are not necessarily indicative of the results that may be expected
for the full year. A complete description of the Corporation's accounting
policies and footnotes is contained in the 1996 Annual Report to Shareholders.
NOTE 2: BUSINESS COMBINATIONS
On February 14, 1997, the Corporation issued 754,810 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. The
acquisition was accounted for under the pooling of interests method of
accounting and, accordingly, all financial data of the Corporation for prior
periods has been restated to include the financial position and operating
results of this acquisition. At the date of acquisition, BMC had total assets
and shareholders' equity of $100,041 and $13,583, respectively.
On October 14, 1997, the Corporation signed a definitive agreement to
acquire all of the outstanding shares of Pinnacle Financial Services, Inc.
(Pinnacle), headquartered in St. Joseph, Michigan. Under terms of the
agreement, the Corporation will issue approximately 13 million shares of its
common stock. The transaction will be accounted for under the pooling of
interests method of accounting and is subject to approval by shareholders of
the Corporation and Pinnacle and applicable regulatory agencies. Although the
Corporation anticipates that the merger will be consummated during the second
quarter of 1998, there can be no assurances that the acquisition will be
completed. At September 30, 1997, Pinnacle had total assets and shareholders'
equity of $2,185,174 and $175,697, respectively.
Page 5 of 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
NOTE 3: INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for Sale at September 30, 1997:
Federal agencies:
Bonds and notes $ 100,970 $ 203 $ (132) $ 101,041
Mortgage-backed securities 1,175,223 7,514 (1,920) 1,180,817
State and municipal 71,071 2,103 (47) 73,127
Collateralized mortgage obligations 74,779 496 (1,861) 73,414
Other securities 27,005 371 (76) 27,300
- ------------------------------------------------------------------------------------------------
Total $1,449,048 $ 10,687 $ (4,036) $1,455,699
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held to Maturity at September 30, 1997:
Federal agencies:
Mortgage-backed securities $ 71,248 $ 120 $ (1,066) $ 70,302
State and municipal 138,134 5,412 (179) 143,367
Collateralized mortgage obligations 28,005 (136) 27,869
- --------------------------------------------------------------------------------------------
Total $ 237,387 $ 5,532 $ (1,381) $241,538
============================================================================================
</TABLE>
The amortized cost and estimated market value of investment securities at
September 30, 1997, by contractual maturity, 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.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED MARKET AMORTIZED Market
COST VALUE COST Value
<S> <C> <C> <C> <C>
Maturity distribution
at September 30, 1997:
Due in one year or less $ 5,711 $ 5,762 $ 551 $ 552
Due after one year through five years 99,042 99,515 23,058 23,816
Due after five years through ten years 21,927 22,121 46,466 48,276
Due after ten years 45,863 47,261 68,059 70,723
Mortgage-backed securities 1,175,223 1,180,817 71,248 70,302
Collateralized mortgage obligations 74,779 73,414 28,005 27,869
- --------------------------------------------------------------------------------------------------------------------------------
Total debt securities 1,422,545 1,428,890 237,387 241,538
Equity securities 26,503 26,809
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 1,449,048 $ 1,455,699 $ 237,387 $ 241,538
================================================================================================================================
</TABLE>
Page 6 of 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3: INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY,
CONTINUED:
Proceeds from sales of investment securities available for sale during
the nine months ended September 30, 1997, were $599,242. Gross gains and
losses realized on those sales were $2,099 and $1,189, respectively.
NOTE 4: IMPAIRED LOANS
At September 30, 1997, impaired loans totaled $15,785. An allowance for
loan losses of $1,361 was recorded for impaired loans totaling $6,628. At
December 31, 1996, impaired loans totaled $18,172. An allowance of $1,653 was
recorded for impaired loans totaling $7,420. The average balance for impaired
loans was $14,424 for the nine months ended September 30, 1997.
NOTE 5: 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. Amortization of premiums paid for
interest rate caps totaled $1,512 and $1,060 for the nine months ended
September 30, 1997 and 1996, respectively. This expense was offset by
counterparty reimbursements of $288 and $586 for the nine months ended
September 30, 1997 and 1996, respectively.
At September 30, 1997, the notional amount of the interest rate caps was
$390,000. The caps are indexed to LIBOR with contract strike prices ranging
from 5.50% to 6.00% and mature through the fourth quarter of 1999. The
carrying value and estimated market value of the caps at September 30, 1997,
was $2,638 and $1,429, respectively.
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 September 30,
1997, the Corporation had swaps with a notional value of $55,000. 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
paid $2,473 while receiving $2,360 from these agreements during the nine
months ended September 30, 1997.
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 September 30, 1997, option forward contracts, if exercised, committed
the Corporation to sell $20,000 par value of mortgage-backed securities
available for sale at prices not less than their carrying values during the
fourth quarter of 1997. Fees received from these contracts have been deferred
until expiration, termination or exercise of the contract.
Page 7 of 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6: LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Parent Company:
Convertible subordinated debentures, 7.50%, called effective
October 3, 1997 $ 1,185 $ 6,029 $ 6,164
Notes payable, unsecured:
9.81%, payable $600 annually through 1996, balance due in
1997 2,400 2,400 3,000
Variable rate adjusted with changes in LIBOR, payable $250
quarterly through 2000 (6.16%, 6.16% and 6.04% at
September 30, 1997, December 31, 1996, and
September 30, 1996, respectively) 3,750 4,500 4,750
Variable rate adjusted with changes in LIBOR, due 1999
(6.16% and 6.04% at September 30, 1997, and
September 30, 1996, respectively) 26,000 12,200
Subsidiaries:
Federal Home Loan Bank advances, due at various dates through
2016 (weighted average rates of 5.66%, 5.56% and 5.64% at
September 30, 1997, December 31, 1996 and September 30,
1996, respectively) 218,640 158,640 157,867
Notes payable, revolving credit agreement, secured by finance
receivables, variable rate adjusted with changes in LIBOR
(6.03% at September 30, 1996, paid in October 1996) 17,088
Other, including capitalized leases 5,851 5,161 5,213
- -------------------------------------------------------------------------------------------------------------
Total $ 257,826 $ 176,730 $ 206,282
=============================================================================================================
</TABLE>
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.
On September 2, 1997, the Corporation called the $5.6 million of
outstanding convertible subordinated debentures effective October 3.
Debentures totaling $4.4 million were converted during the third quarter
resulting in 259,344 shares being issued. An additional 68,864 shares were
issued during the fourth quarter related to the conversion of the remaining
debentures.
Page 8 of 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7: 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.
On September 10, 1996, the Corporation declared a one-for-twenty stock
dividend, distributed October 11, 1996. A one-for-twenty dividend was also
declared on August 11, 1997, and distributed September 18, 1997. All share
data included in the consolidated financial statements, notes and Management's
Discussion and Analysis has been adjusted for these stock dividends.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share." This statement simplifies the
computation of earnings per share and requires dual presentation of basic and
diluted earnings per share on the face of the income statement. This
statement is effective for financial statements issued for periods ending
after December 15, 1997, with earlier application not permitted.
The application of this standard would have resulted in earnings per share
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Proforma basic net income per share $ .62 $ .34 $ 1.77 $1.31
Proforma diluted net income per share .61 .32 1.73 1.27
Reported net income per share .62 .34 1.75 1.30
</TABLE>
NOTE 8: NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components. In addition, the
Financial Accounting Standards Board has issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for disclosing information about operating segments in
interim and annual financial statements. The Corporation will comply with the
new disclosure requirements beginning in 1998. The application of the new
rules will not have a material impact on the Corporation's financial condition
or results of operations.
Page 9 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except for share data)
OVERVIEW
- --------
Net income for the three months ended September 30, 1997, was $12,750,
compared to $7,078 earned in the same period of 1996, when a one-time special
assessment, required of all financial institutions with deposits insured by
the Savings Association Insurance Fund (SAIF), reduced net income by $3,045,
or $.14 on a per share basis. Net income per share was $.62 for the three
months ended September 30, 1997, compared to $.34 for the three months ended
September 30, 1996. Net income for the first nine months of 1997 was $36,368
compared to $27,062 earned in the same period of 1996, an increase of 34.4%.
Net income per share was $1.75 and $1.30 for the nine months ended September
30, 1997 and 1996, respectively. The increased earnings was primarily due to
growth in earning assets and non-interest income. Net interest income
increased $7,526, or 6.8%, over the first nine months of 1996 due to growth in
earning assets of 10.4%. The net interest margin, however, declined from
4.15% for the first three quarters of 1996 to 4.04% for the first three
quarters of 1997, primarily due to reduced loan yields coupled with an
increase in cost of funds.
Net income of $12,750 for the third quarter of 1997 increased over 1997
first and second quarter results of $11,552 and $12,066, respectively. Net
income per share was $.62 for the third quarter of 1997 compared to $.55 and
$.58 for the first and second quarters of 1997, respectively.
The Corporation's total assets at September 30, 1997, were $4,416,571,
which were $199,996 greater than the $4,216,575 at December 31, 1996, and
$336,253, or 8.2%, greater than total assets at September 30, 1996. Total
loans of $2,436,103 at September 30, 1997, increased from $2,275,089 at
December 31, 1996, and from $2,192,945 one year ago.
Annualized returns on average assets and average shareholders' equity for
the nine months ended September 30, 1997, were 1.13% and 15.05%, respectively,
compared with .93% and 11.44% for the same period of 1996. For the quarter
ended September 30, 1997, annualized returns on average assets and average
shareholders' equity were 1.17% and 15.86%, respectively, compared to .70% and
8.72% in the third quarter of 1996, including the one-time SAIF assessment.
Cash dividends, adjusted for the 5% stock dividend declared August 11,
1997, of $.21 per share were declared during the third quarter of 1997
representing an increase of 10.5% compared with $.19 per share during the same
period of 1996. For the nine months ended September 30, 1997 and 1996, total
dividends declared were $12,908 and $11,516, respectively.
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. Net
interest income was $117,827 for the nine months ended September 30, 1997,
compared with $110,301 for the same period in 1996. Net interest income for
the most recent quarter was $39,568 compared to $38,231 for the three months
ended September 30, 1996. The increased net interest income was the result of
a 7.5% and 10.4% increase in average earning assets on a quarter and
year-to-date basis, respectively, compared to 1996 periods, partially offset
by a decline in the net interest margin over the same periods. Net interest
income for the most recent quarter was $291 less than the $39,859 recorded in
the second quarter of 1997 due to the effects of a reduced net interest margin
partially offset by a $38.7 million increase in average earning assets.
Page 10 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INTEREST INCOME, CONTINUED
- ------------------------------
The net interest margin is a percentage computed by dividing net interest
income on a fully taxable equivalent basis ("FTE") by average earning assets
and represents a measure of basic earnings on interest bearing assets held by
the Corporation. The annualized net interest margins were 4.04% and 4.15%,
respectively, for the nine months ended September 30, 1997 and 1996. Average
earning assets for the nine months ended September 30, 1997, increased to
$4,028,258 from $3,650,075 for the same period in 1996. Average loans
increased $249 million to $2,348,204 for the first three quarters of 1997
compared to 1996 and represented 58.3% of earning assets compared to 57.5% in
1996. Average investment securities increased $219 million during the first
nine months of 1997 compared to 1996 and represented 41.1% and 39.3% of
earning assets for similar periods of 1997 and 1996, respectively.
NET INTEREST MARGIN
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
<S> <C> <C>
Yields (FTE)
Loans 9.29% 9.34%
Securities 7.02 6.93
Other earning assets 7.09 7.13
----- -----
Total earning assets 8.34 8.32
Cost of funds
Interest bearing deposits 4.64 4.58
Other interest bearing liabilities 5.45 5.37
----- -----
Total interest bearing liabilities 4.83 4.73
----- -----
Total interest expense to earning assets 4.30 4.17
- ----------------------------------------------------------------------
Net interest margin 4.04% 4.15%
======================================================================
</TABLE>
The decline in the net interest margin from the first nine months of 1996
was primarily due to the May 30 sale of the credit card portfolio and an
increased cost of funds. The sale of the credit card portfolio resulted in
approximately a 4 basis point reduction in the margin. Interest income as a
percentage of earning assets increased 2 basis points to 8.34% during the
first nine months of 1997 compared to 8.32% during the same period one year
prior despite the sale of the credit card portfolio. Yields on loans declined
5 basis points to 9.29% during this period. The yield on investment
securities increased from 6.93% for the first nine months of 1996 to 7.02% for
the same period of 1997. Interest expense as a percentage of earning assets
increased by 13 basis points from 4.17% to 4.30% from the first three quarters
of 1996 to the first three quarters of 1997, respectively, due to more
competitive pricing and a shift in the funding mix to marginally
higher-costing funds.
An ongoing objective of the Corporation's asset/liability management
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. The rate sensitivity position is
computed for various repricing intervals by calculating rate sensitivity gaps.
The Corporation had a cumulative one-year negative gap on September 30, 1997,
of $172,107 which represented 4.1% of the $4,147,989 in earning assets at that
date. Net interest income at financial institutions with negative gaps tends
to decrease in periods of rising interest rates and increase as interest rates
Page 11 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INTEREST INCOME, CONTINUED
- ------------------------------
decline. Management also utilizes a simulation model 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 approximately 2.25% or less should interest rates increase or
decrease by up to 200 basis points.
NON-INTEREST INCOME
- -------------------
During the first nine months of 1997, non-interest income was $43,774
compared to $41,903 reported for the same period in 1996. The first nine
months of 1996 included net gains of $4,914 from the securitization of two
large packages totaling $235 million of residential mortgage loans. Net
securities gains of $910 were recorded during the first nine months of 1997
compared to $702 for the same period of 1996. Excluding net loan
securitization and securities gains, non-interest income for the nine months
ended September 30, 1997, totaled $42,864, which represented an increase of
18.1% compared to the same period of 1996. Third quarter 1997 non-interest
income was $1,176 greater than second quarter 1997 but $213 less than the 1996
third quarter when $2,336 of the above gains from loan securitizations were
recorded. Improvements were broad based as most non-interest categories
increased from third quarter 1996 and second quarter 1997.
NON-INTEREST INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE
1997 1996 (DECREASE)
<S> <C> <C> <C>
Service charges on deposit accounts $ 10,480 $ 9,329 $ 1,151
Trust and plan administration fees 6,258 4,775 1,483
Insurance premiums and commissions 6,252 6,046 206
Mortgage banking revenue 4,317 8,681 (4,364)
Non-interest fees on loans 4,168 3,998 170
Investment products fees 2,714 2,616 98
Net securities gains 910 702 208
Other 8,675 5,756 2,919
- -------------------------------------------------------------------------------
Total non-interest income $ 43,774 $ 41,903 $ 1,871
===============================================================================
</TABLE>
Service charges on deposit accounts increased $1,151 or 12.3% due to
increased volumes and improved efforts to collect a greater percentage of
assessed fees. Trust and plan administration fees increased $1,483 or 31.1%
compared to the first nine months of 1996 primarily due to increased benefit
plan administration fees of $1,063 resulting from the May 31, 1996 purchase of
Small Parker & Blossom. Insurance commissions increased $206 for the nine
months ended September 30, 1997, compared to 1996. Income from the sale of
credit life and disability insurance offered by the Corporation's banking
subsidiaries increased $152 or 5.6% due to improved sales penetration to new
loan customers. Casualty insurance premiums increased $110 or 3.7%. Profit
sharing bonuses received from insurance underwriters during the first three
quarters of 1997, which are experience related and associated with policies
written during the prior year, were $56 less than payments received in 1996.
Mortgage banking revenues declined by $4,364 during the first nine months of
1997 compared to the same period of 1996. During the first and third quarters
of 1996, $235 million of residential mortgage loans were securitized
Page 12 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST INCOME, CONTINUED
- ------------------------------
generating net gains of $4,914. Non-interest fees on loans increased $170
during the first nine months of 1997 compared to 1996 primarily due to
increased merchant credit card transaction volumes. Merchant transactions
generated revenues of $2,675 during the first nine months of 1997 compared to
$2,369 for the same period one year ago. This was partially offset by reduced
retail credit card revenues due to the sale of the portfolio. During the
second quarter of 1997 the Corporation entered into a joint marketing
arrangement with a leading national credit card issuer which included the sale
of its $31 million credit card portfolio. The Corporation continues to
receive a portion of future credit card revenues generated from its customers
without any credit risk associated with the outstanding balances. Other income
increased to $8,675 during the nine months ended September 30, 1997, from
$5,756 for the comparable period of 1996. The Corporation recorded a gain of
$646 during the second quarter of 1997 from the sale of its credit card
portfolio, as previously discussed. The remaining increase is due in part to
increased revenues of $296 from net trading account gains, $279 from the
expiration of interest rate option contracts, $1,424 from a corporate-owned
life insurance program and $419 from non-customer ATM access fees, a new
revenue source beginning in May 1996.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense, which includes personnel, occupancy costs,
equipment and other operating expenses was $98,217 for the nine months ended
September 30, 1997, compared to $104,289 for the same period of 1996, a
decrease of 5.8%. Non-recurring charges of $4.5 million for personnel
expenses related to the continued centralization of back-office functions and
various other one-time charges related to closed offices and equipment no
longer used and a $5.0 million SAIF assessment were included in non-interest
expenses for the first nine months of 1996. Excluding these charges,
non-interest expenses increased $3,325 or 3.5% from the nine months ended
September 30, 1996.
NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE
1997 1996 (DECREASE)
<S> <C> <C> <C>
Salaries and employee benefits $ 53,483 $ 50,937 $ 2,546
Data processing and other services 9,156 9,031 125
Occupancy 6,874 6,528 346
Equipment 5,835 5,461 374
Professional fees 3,191 2,979 212
Advertising and promotion 3,132 3,420 (288)
Printing and supplies 2,660 2,761 (101)
Postage and freight 2,589 2,683 (94)
SAIF assessment 4,963 (4,963)
Other 11,297 15,526 (4,229)
- --------------------------------------------------------------------------------
Total non-interest expense $ 98,217 $ 104,289 $ (6,072)
================================================================================
</TABLE>
Salaries and employee benefits increased $2,546 or 5.0% for the nine
month period in 1997 over 1996. Performance-based incentives and commissions
increased $1,379 to $6,605 during the first three quarters of 1997 and
represented 12.4% of salaries and employee benefits expense compared to 10.3%
for the same period of 1996.
Page 13 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST EXPENSE, CONTINUED
- -------------------------------
The Corporation continues to emphasize performance-based awards tied to net
income per share and sales of fee- based services. A portion of the salary
expense increase is due to increased staff from May 1996 acquisitions where
prior periods were not restated. The remaining increase is generally due to
normal salary increases and related expenses associated with increased
business activity. Occupancy and equipment expenses increased 5.3% and 6.8%,
respectively, during the first nine months of 1997 as the Corporation was
operating additional finance offices and two new non-banking subsidiaries
during 1997 compared to 1996. Professional fees increased $212 during the
first three quarters of 1997 compared to the same period one year ago due to
increased legal fees and fees in lieu of salaries as certain staff functions
have been outsourced. Reduced credit card promotions resulted in a reduction
in advertising expense of $288 or 8.4% from one year ago. Management chose
not to offer any significant credit card solicitations in light of the
increase in credit card delinquencies experienced nationally by the credit
card industry and the pending sale of its portfolio, which became effective
May 30, as previously discussed. Other expenses decreased $4,229 during the
first nine months of 1997 compared to the same period of 1996. One-time
charges of $1,983 related to the closure of five offices recorded during the
first quarter of 1996 and charges of $922 for equipment write-offs and other
one-time operational charges recorded during the third quarter accounted for
the majority of the decrease. FDIC assessments, exclusive of the one-time
SAIF assessment, decreased $1,378 during the nine months ended September 30,
1997, compared to the same period of 1996 as a result of assessment rate
modifications approved in September 1996. Operating expenses as a percentage
of revenues, commonly referred to as the efficiency ratio, improved from 63%
during the first nine months of 1996 to 59% during the first nine months of
1997.
Management has formed a task force to analyze the business and operational
risk associated with modifying systems for the year 2000. Completion of the
study and full implementation of any required changes are targeted for December
31, 1998. However at this time, management does not anticipate any material
impact to the Corporation.
INCOME TAX EXPENSE
- ------------------
Income tax expense was $18,462 for the nine months ended September 30,
1997, compared with $13,975 for the same period in 1996. The effective tax
rate was 33.7% and 34.1% for the nine months ended September 30, 1997 and
1996, 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 from municipal
securities increased $1,995 during the first nine months of 1997 as additional
investments were made. Investments in corporate-owned life insurance policies
on certain officers generated $1,424 of additional income during the first
three quarters of 1997 compared to the same period one year ago.
LOANS
- -----
Loans were $2,436,103 at September 30, 1997, compared to $2,275,089 at
December 31, 1996, and $2,192,945 at September 30, 1996. The loan portfolio
increased $161,014 or 9.4% annualized from year-end 1996 and $243,158 or 11.1%
from one year ago. Growth was experienced in all loan categories during the
third quarter of 1997 compared to year-end 1996 and one year prior and the mix
of the loan portfolio remained relatively constant over the last twelve months.
Page 14 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS, CONTINUED
- -----------------
<TABLE>
<CAPTION>
LOANS OUTSTANDING
- ------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
<S> <C> <C> <C>
Commercial, industrial and agricultural
production loans $ 708,704 $ 679,609 $ 630,540
Tax exempt loans 26,164 21,756 20,632
Real estate mortgage loans:
Commercial and agricultural 233,863 171,715 158,435
Construction 96,750 67,679 67,784
Residential 749,142 740,647 727,766
Consumer loans 621,480 593,683 587,788
- ------------------------------------------------------------------------------------------------
Total loans $ 2,436,103 $ 2,275,089 $ 2,192,945
================================================================================================
</TABLE>
Commercial loans increased to $708,704 at September 30, 1997, compared
to $679,609 at December 31, 1996 and $630,540 at September 30, 1996.
Commercial loans accounted for 29.1% of the loan portfolio at September 30,
1997 compared to 28.8% at September 30, 1996.
Real estate mortgage loans, which consist of residential, commercial and
agricultural loans secured by real estate and construction loans, totaled
$1,079,755 at September 30, 1997, compared to $953,985 one year prior.
Residential mortgage loans increased $8,495 from year-end 1996 and $21,376
from one year ago. Residential mortgage loans were 30.8% of total loans at
September 30, 1997, compared to 33.1% one year prior. Demand for new
residential mortgage loans remained strong throughout most of 1996 and during
the second and third quarters of 1997 but the Corporation sold a significant
portion of that production. The Corporation originated $52 million of
residential mortgage loans in the first quarter of 1997, $77 million in the
second quarter and $80 million in the third quarter. 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 held in the 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 September 30, 1997, $851,713 of
residential mortgage loans originated by the Corporation's subsidiary banks
and subsequently sold in the secondary market were being serviced. In
addition to residential real estate mortgages reported as loans, the
Corporation held $17,969, $6,457 and $4,754 of real estate loans for sale at
September 30, 1997, December 31, 1996, and September 30, 1996, respectively.
Consumer loans, which include installment, home equity and credit card
loans, increased $27,797 from December 31, 1996, and $33,692 from one year
ago. As previously mentioned, the Corporation sold its credit card portfolio
effective May 30. These loans totaled $34,523 at December 31, 1996, and
$33,870 at September 30, 1996. Excluding credit card loans, consumer loans
increased $62,320 and $67,562 from December 31, 1996, and September 30, 1996,
respectively. Of this increase from one year ago, $19.2 million was the result
of 1996 acquisitions. Installment loan balances have continued to increase
during 1997 primarily due to indirect automobile loans. Direct installment
loan activity was promoted more heavily during the second and third quarters
and increased $14,603 or 7.3% annualized from year-end 1996. Home equity and
other lines of credit outstandings increased $11,003 and $14,726 from year-end
1996 and one year ago, respectively.
Page 15 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS, CONTINUED
- ----------------
The Corporation's loan portfolio contains no loans to foreign
governments, foreign enterprises, foreign operations of domestic companies,
nor any concentrations to borrowers engaged in the same or similar industries
that exceed 10% of total loans.
ASSET QUALITY
- --------------
The allowance for loan losses is maintained at a level considered
adequate by management to absorb potential loan losses 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
portfolio, the volume and condition of loans outstanding, 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.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
<S> <C> <C>
Beginning balance $ 31,262 $ 29,406
Allowance of subsidiaries at acquisition date 1,872
Provision for loan losses 8,554 6,878
Loans charged-off (7,833) (10,173)
Recoveries 2,127 2,723
- --------------------------------------------------------------------------------
Ending balance $ 34,110 $ 30,706
================================================================================
- --------------------------------------------------------------------------------
Percent to total loans 1.40% 1.40%
================================================================================
</TABLE>
The allowance for loan losses was $34,110 at September 30, 1997,
representing 1.40% of total loans, compared with $31,262 at December 31, 1996,
which represented 1.37% of total loans and $30,706 at September 30, 1996,
which represented 1.40% of total loans. Annualized net charge-offs to average
loans was .32% during the first nine months of 1997 compared to .47% for the
same period of 1996. The provision for loan losses to average loans was .49%
and .44% for the nine months ended September 30, 1997 and 1996, respectively.
The allowance for loan losses to non-performing loans was 168% at September
30, 1997, compared to 144% at December 31, 1996, and 147% at September 30,
1996.
Risk assets consist of non-performing loans, foreclosed properties and
loans 90 days or more past due but accruing. Although these assets have more
than a normal risk of loss, they will not necessarily result in a higher level
of future charge-offs or losses.
Non-performing loans consist of loans classified as troubled debt
restructurings and loans on non-accrual status. As indicated in the following
table, the Corporation's non-performing loans as of September 30, 1997,
totaled $20,273, a decrease of $1,493 from December 31, 1996. The
non-performing loans to total loans ratio was .83% on September 30, 1997, as
compared to .96% on December 31, 1996, and .95% on September 30, 1996. Total
risk assets equaled 1.01% of loan-related assets at September 30, 1997,
compared to 1.20% at December 31,
Page 16 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ASSET QUALITY, CONTINUED
- ------------------------
1996. In addition to loans classified as risk assets, there were other loans
totaling $9,655 at September 30, 1997, where the borrowers were experiencing
difficulties and management is closely monitoring the borrowers' abilities to
comply with payment terms. However, conditions at this time do not warrant
classification as risk assets.
NON-PERFORMING AND RISK ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
<S> <C> <C> <C>
Non-accrual loans:
Commercial, agricultural and tax exempt $ 6,173 $ 10,112 $ 11,063
Real estate mortgage 11,581 8,437 6,765
Consumer 1,373 1,960 1,806
--------------- -------------- ---------------
Total non-accrual 19,127 20,509 19,634
Restructured loans 1,146 1,257 1,294
--------------- -------------- ---------------
Total non-performing loans 20,273 21,766 20,928
Foreclosed properties 2,354 1,721 2,456
--------------- -------------- ---------------
Total non-performing assets 22,627 23,487 23,384
90 days or more past due:
Commercial, agricultural and tax exempt 144 267 492
Real estate mortgage 644 2,033 2,241
Consumer 1,254 1,457 1,506
--------------- -------------- ---------------
Total 90 days or more past due 2,042 3,757 4,239
--------------- -------------- ---------------
Total risk assets $ 24,669 $ 27,244 $ 27,623
================================================================================================
- ------------------------------------------------------------------------------------------------
Risk assets to loan-related assets 1.01% 1.20% 1.26%
================================================================================================
</TABLE>
INVESTMENT SECURITIES
- ---------------------
Total investment securities available for sale and held to maturity
represented 40.8% of earning assets at September 30, 1997, compared to 41.3%
and 41.7% at December 31, 1996, and September 30, 1996, respectively. The
portfolio has continued to shift toward investments in mortgage-backed
securities, predominately underwritten to the standards of, and guaranteed by
government sponsored enterprises. These securities generally yield 70-100
basis points more than comparable U.S. Treasury securities. Mortgage-backed
securities differ 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 the underlying mortgages are
refinanced at lower market rates. Conversely, the average lives of these
securities generally are extended as interest rates increase. The estimated
average life of these securities and the overall portfolio was 4.3 years and
4.8 years, respectively, at September 30, 1997.
Page 17 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DEPOSITS AND OTHER SOURCES OF FUNDS
- -----------------------------------
Total deposits were $3,054,444 at September 30, 1997, compared to
$3,114,730 and $2,961,575 at December 31, 1996, and September 30, 1996,
respectively. Since December 31, 1996, non-interest bearing deposits, which
were seasonally high at year-end, declined by $35,087 and interest bearing
deposits decreased by $25,199. A change in the mix of interest-bearing
deposits due to changes in market rates and new product features and
promotions resulted in money market deposit accounts increasing $80,605 from
year-end to $409,397 while large certificates of deposit declined $34,939
during this period to $210,442, interest checking accounts declined $43,394 to
$376,269 and savings accounts declined $19,358 to $212,405. The Corporation
increased its short-term borrowings as a more cost-effective funding
alternative to large certificates of deposit and certain other
interest-bearing deposit sources. Non-interest bearing deposits increased
from September 30, 1996, by $1,061 while interest bearing deposits increased
by $91,808.
Securities sold under repurchase agreements are acquired in national
markets as well as from the Corporation's commercial customers as part of a
cash management service. Repurchase agreements, which play a key role in
funding earning assets, were $656,046, $530,261 and $503,738 at September 30,
1997, December 31, 1996, and September 30, 1996, respectively. A portion of
these repurchase agreements, acquired to fund certain fixed rate earning
assets, is being hedged by interest rate caps.
Long-term debt totaled $257,826 at September 30, 1997, compared to
$176,730 at December 31, 1996, and $206,282 at September 30, 1996. Advances
from the Federal Home Loan Bank accounted for $218,640 of total long-term debt
at September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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. The Corporation manages its liquidity
needs 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 September 30, 1997, the Corporation had $289,349 in investment
securities maturing within one year. The Corporation additionally has federal
funds lines and other borrowing sources available to it and its subsidiary
banks. Investment securities maturing within one year and unused borrowing
sources are considered by management to provide adequate liquidity in view of
projected needs. The Parent Company's liquidity is provided by dividends from
its subsidiaries and a $35,000 bank line of credit of which $26,000 was being
used at September 30, 1997.
The Corporation continues to maintain a strong capital position which
supports its current needs and provides a sound foundation to support further
expansion. Total shareholders' equity at September 30, 1997, was $329,804,
compared to $325,414 at December 31, 1996 and $317,277 at September 30, 1996.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action,
Page 18 of 24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
- ------------------------------------------
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. 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 of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, that as of
September 30, 1997, the Corporation and its banking subsidiaries exceeded all
regulatory capital adequacy requirements to which they were subject.
As of September 30, 1997, the most recent notification from regulatory
agencies categorized the subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
subsidiary banks' categories. The Corporation's actual and minimum required
capital amounts and ratios as mandated by the regulators at September 30,
1997, include:
<TABLE>
<CAPTION>
REQUIREMENTS TO BE
MINIMUM CLASSIFIED
ACTUAL REQUIREMENTS AS "WELL CAPITALIZED"
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital to risk weighted assets $333,067 12.20% $218,377 8.00% $272,972 10.00%
Tier 1 Capital to risk weighted assets 297,772 10.91 109,189 4.00 163,783 6.00
Tier 1 Capital to average assets 297,772 6.89 172,755 4.00 215,944 5.00
(leverage ratio)
</TABLE>
Page 19 of 24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS NONE
ITEM 2. CHANGES IN SECURITIES NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE
ITEM 5. OTHER INFORMATION NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibits
--------
a. The following exhibit is submitted herewith:
27 - Financial Data Schedule
Reports on Form 8-K
-------------------
b. A report on Form 8-K dated October 20, 1997 was filed regarding
the announcement of the merger of Pinnacle Financial Services,
Inc. with CNB Bancshares, Inc.
- --------------------------------------------------------------------------------
No other information is required to be filed under Part II of the form.
Page 20 of 24
<PAGE>
CNB BANCSHARES, INC.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Bancshares, Inc.
--------------------------
(Registrant)
Date November 13, 1997 by /s/ James J. Giancola
----------------------- --------------------------
James J. Giancola,
President and Chief Executive Officer
Date November 13, 1997 by /s/ Ralph L. Alley
----------------------- --------------------------
Ralph L. Alley, Senior Vice President,
Controller and Treasurer
(Principal Accounting Officer)
Page 21 of 24
<PAGE>
EXHIBIT INDEX
Reg. S-K
Exhibit No. Description of Exhibit Page
- ----------- ----------------------
27 Financial Data Schedule 23
Page 22 of 24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
CNB Bancshares, Inc.'s consolidated balance sheet as of September 30,
1997 and the consolidated statement of income for the nine months
ended September 30, 1997, and is qualified in its entirety by reference
to such financial statements.
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