======================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
- ----------------------------------------------------------------------
Date of Report (Date of earliest event reported): June 3, 1998
-------------------
CNB BANCSHARES, INC.
---------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Indiana
--------------------------
(State or Other Jurisdiction of Incorporation)
0-11510 35-1568731
----------------------- -------------------
(Commission File Number) (IRS Employer Identification No.)
20 N.W. Third Street, Evansville, Indiana 47739
----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(812) 456-3400
----------------------------
Registrant's Telephone Number, Including Area Code
Not Applicable
---------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
======================================================================
Page
ITEM 5. OTHER EVENTS.
- ------ ------------
On April 17, 1998, CNB Bancshares, Inc., an Indiana
corporation (the "Registrant"), completed its merger with
Pinnacle Financial Services, Inc., a Michigan corporation
("Pinnacle"). Each outstanding share of Pinnacle common stock
was converted into 1.0365 shares of the Registrant's common
stock, resulting in the issuance of 13.1 million common shares to
the former Pinnacle shareholders. The transaction was accounted
for as a pooling of interests for accounting and financial
reporting purposes.
Attached to this Form 8-K as Exhibit 99(a) are supplemental
audited consolidated financial statements of the Registrant, and
the accompanying notes thereon, giving effect to the Pinnacle
merger to the beginning of the periods presented.
Item 7. Financial Statements and Exhibits.
- ------ ---------------------------------
(c) Exhibits:
--------
Exhibit 23(a) Consent of KPMG Peat Marwick LLP.
Exhibit 99(a) Restated Supplemental Consolidated Balance
Sheets as of December 31, 1997 and 1996, the
related Supplemental Consolidated Statements
of Income, Changes in Shareholders' Equity,
and Cash Flows for each of the years in the
three-year period ended December 31, 1997,
and the notes to the Supplemental Consolidated
Financial Statements.
Page
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: June 3, 1998
CNB BANCSHARES, INC.
--------------------------------------
(Registrant)
By: /s/ John R. Spruill
--------------------------------------
John R. Spruill
Executive Vice President
Page
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- -----------
23(a) Consent of KPMG Peat Marwick LLP.
99(a) Restated Supplemental Consolidated Balance
Sheets as of December 31, 1997 and 1996,
the related Supplemental Consolidated Statements
of Income, Changes in Shareholders' Equity,
and Cash Flows for each of the years in the
three-year period ended December 31, 1997,
and the notes to the Supplemental Consolidated
Financial Statements.
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CNB Bancshares, Inc.:
We consent to the incorporation by reference in registration
statement No. 333-14413 on Form S-3 and in the below
scheduled Form S-8 registration statements of our report
dated June 1, 1998 on the supplemental consolidated
financial statements of CNB Bancshares, Inc. and
subsidiaries incorporated by reference on Form 8-K.
COMMISSION
FILE
NUMBER
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
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
CNB Bancshares, Inc. Associate Stock Option
Plan 333-38907
Indiana Federal Corporation 1986 Stock Option
and Incentive Plan 333-46837
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
June 3, 1998
To the Shareholders and Board of Directors, CNB Bancshares, Inc:
We have audited the accompanying supplemental consolidated balance sheet of
CNB Bancshares, Inc. and subsidiaries (the Corporation) as of December 31,
1997 and 1996, and the related supplemental consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These supplemental consolidated
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required 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.
The supplemental consolidated financial statements give retroactive effect to
the merger of the Corporation and Pinnacle Financial Services, Inc. on April
17, 1998, which has been accounted for as a polling of interest as described
in the notes to the supplemental consolidated financial statements. Generally
accepted accounting principles prescribe giving effect to a consummated
business combination accounted for by the pooling of interest method in
financial statements that do not include the date of consummation. These
supplemental consolidated financial statements do not extend through the date
of consummation; however, they will become the historical consolidated
financial statements of CNB Bancshares, Inc. and subsidiaries after the
consolidated financial statements covering the date of consummation of the
business combination are issued.
In our opinion, the supplemental 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles applicable after consolidated financial
statements are issued for a period which includes the date of consummation of
the business combination.
St. Louis, Missouri
June 1, 1998
<PAGE>
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(In thousands, except for share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 156,158 $ 175,426
Federal funds sold and other short-term money market investments 21,202 63,549
------------- ----------
TOTAL CASH AND CASH EQUIVALENTS 177,360 238,975
Real estate loans held for sale 50,823 17,942
Investment securities available for sale 1,854,047 1,893,358
Investment securities held to maturity
(market value $236,242 in 1997 and $263,498 in 1996) 230,903 262,387
Loans, net of unearned income 3,988,016 3,690,944
Less: Allowance for loan losses 55,222 46,171
------------- ----------
NET LOANS 3,932,794 3,644,773
Premises and equipment 104,302 97,550
Interest receivable 46,902 46,641
Intangible assets 48,325 51,296
Other assets 150,262 98,863
------------- ----------
TOTAL ASSETS $ 6,595,718 $6,351,785
============= ==========
LIABILITIES
Deposits:
Non-interest bearing $ 464,596 $ 480,381
Interest bearing 4,149,959 4,113,060
------------- -----------
TOTAL DEPOSITS 4,614,555 4,593,441
Securities sold under repurchase agreements 586,855 562,364
Federal funds purchased and other short-term borrowings 94,220 99,508
FHLB advances and other long-term debt 722,393 545,968
Interest payable and other liabilities 62,232 54,831
------------- -----------
TOTAL LIABILITIES 6,080,255 5,856,112
SHAREHOLDERS' EQUITY
Common stock, $1 stated value
Shares authorized: 50,000,000
Shares issued: 33,484,443 in 1997 and 32,482,151 in 1996 33,484 32,482
Capital surplus 364,997 345,021
Retained earnings 110,333 119,378
Net unrealized gains (losses) on investment
securities available for sale 6,649 (1,208)
------------- -----------
TOTAL SHAREHOLDERS' EQUITY 515,463 495,673
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,595,718 $6,351,785
============= ===========
See notes to supplemental consolidated financial statements.
</TABLE>
Page 2
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(In thousands, except for share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees:
Taxable $ 346,655 $ 309,627 $ 288,295
Tax exempt 2,257 1,867 2,054
Real estate loans held for sale 2,089 6,557 2,571
Investment securities:
Taxable 135,810 120,516 85,623
Tax exempt 12,542 9,805 6,554
Federal funds sold and other short-term
Money market investments 983 2,374 2,103
Interest on interest bearing deposits with financial institutions 358 982 680
------------------ ----------- -----------
Total interest income 500,694 451,728 387,880
------------------ ----------- -----------
INTEREST EXPENSE
Deposits 191,053 181,229 155,363
Short-term borrowings 38,310 26,505 21,188
FHLB advances and other long-term debt 37,749 26,762 21,897
------------------ ----------- -----------
Total interest expense 267,112 234,496 198,448
------------------ ----------- -----------
NET INTEREST INCOME 233,582 217,232 189,432
Provision for loan losses 24,886 13,283 8,349
------------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 208,696 203,949 181,083
------------------ ----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts 19,792 17,088 14,670
Trust and plan administration fees 9,838 7,720 5,776
Insurance premiums and commissions 8,146 7,916 7,059
Mortgage banking revenue 9,817 11,083 8,207
Non-interest fees on loans 7,010 7,276 6,468
Investment products fees 5,829 5,319 4,298
Net securities gains 2,123 2,204 3,071
Other non-interest income 16,536 10,080 6,888
------------------ ----------- -----------
Total non-interest income 79,091 68,686 56,437
------------------ ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 100,583 90,394 77,029
Data processing and other services 16,160 14,064 13,355
Occupancy 13,799 12,983 11,214
Equipment 11,549 10,797 9,769
Advertising and promotion 6,518 6,734 4,966
Professional fees 8,736 5,966 5,075
Postage and freight 4,871 4,725 3,945
Printing and supplies 5,022 5,157 4,685
Amortization of intangible assets 4,467 4,250 3,029
FDIC assessments 926 3,338 6,041
SAIF assessment 10,963
Other non-interest expense 25,593 22,569 18,000
------------------ ----------- -----------
Total non-interest expense 198,224 191,940 157,108
------------------ ----------- -----------
INCOME BEFORE INCOME TAXES 89,563 80,695 80,412
Income taxes 29,689 27,013 27,565
------------------ ----------- -----------
NET INCOME $ 59,874 $ 53,682 $ 52,847
================== =========== ===========
NET INCOME PER SHARE:
Basic $ 1.80 $ 1.61 $ 1.70
================== =========== ===========
Diluted $ 1.78 $ 1.59 $ 1.67
================== =========== ===========
AVERAGE SHARES OUTSTANDING:
Basic 33,258,369 33,280,258 31,034,422
================== =========== ===========
Diluted 33,801,470 33,924,929 31,840,724
================== =========== ===========
See notes to supplemental consolidated financial statements.
Page 3
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except for share data)
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL RETAINED UNREALIZED
SHARES AMOUNT SURPLUS EARNINGS GAINS/LOSSES TOTAL
------------- -------- --------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 28,167,421 $28,167 $286,334 $ 99,499 $ (12,370) $401,630
Net income for 1995 52,847 52,847
Common dividends declared:
CNB Bancshares, Inc. - $0.53 per share (10,346) (10,346)
Pooled companies prior to acquisition (7,331) (7,331)
Stock dividend 878,823 879 25,042 (25,921)
Issuance of common stock for:
Dividend reinvestment plan 108,984 109 2,984 3,093
Stock options exercised 193,037 193 1,622 1,815
Exercise and conversion of stock
purchase contracts and debentures 17,538 18 295 313
Acquisitions 1,619,842 1,619 21,806 4,178 27,603
Stock offering 893,981 894 12,290 13,184
Other 115,583 116 1,100 1,216
Purchase and retirement of common stock (945,725) (946) (25,318) (26,264)
Change in unrealized gains/losses on
investment securities available for sale 18,029 18,029
BALANCES, DECEMBER 31, 1995 31,049,484 31,049 326,155 112,926 5,659 475,789
Net income for 1996 53,682 53,682
Common dividends declared:
CNB Bancshares, Inc. - $0.78 per share (15,672) (15,672)
Pooled companies prior to acquisition (8,942) (8,942)
Stock dividend 950,040 950 26,553 (27,503)
Issuance of common stock for:
Dividend reinvestment plan 127,090 127 3,433 3,560
Stock options exercised 98,423 98 906 1,004
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 174,081 175 910 1,085
Purchase and retirement of common stock (587,822) (588) (16,302) (16,890)
Change in unrealized gains/losses on
investment securities available for sale (6,867) (6,867)
BALANCES, DECEMBER 31, 1996 32,482,151 32,482 345,021 119,378 (1,208) 495,673
Net income for 1997 59,874 59,874
Common dividends declared:
CNB Bancshares, Inc. - $0.86 per share (17,624) (17,624)
Pooled companies prior to acquisition (11,258) (11,258)
Stock dividend 966,741 967 38,277 (39,244)
Issuance of common stock for:
Dividend reinvestment plan 47,185 47 1,769 1,816
Stock options exercised 549,946 550 10,082 10,632
Exercise and conversion of debentures 350,436 350 5,390 5,740
Other (3,299) (3) 1,101 (48) 1,050
Purchase and retirement of common stock (908,717) (909) (36,643) (37,552)
Change in unrealized gains/losses on
investment securities available for sale 7,857 7,857
Adjustment for change in fiscal year of pooled (745) (745)
companies
BALANCES, DECEMBER 31, 1997 33,484,443 $33,484 $364,997 $ 110,333 $ 6,649 $ 15,463
============= ======== ========= ========== ============== =========
</TABLE>
See notes to supplemental consolidated financial statements.
Page 4
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------- ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 59,874 $ 53,682 $ 52,847
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,187 19,026 14,922
Provision for loan losses 24,886 13,283 8,349
Amortization of premiums and discounts on securities 4,427 2,330 2,529
Deferred income tax benefit (2,978) (1,876) (1,982)
Net securities gains (2,123) (2,204) (3,071)
Loans originated for sale (281,851) (249,733) (220,966)
Proceeds from sale of loans 250,879 227,125 218,282
Increase in interest receivable and other assets, (52,094) (25,173) (20,521)
net of amortization
Increase in interest payable and other liabilities 1,409 5,072 6,504
-------------- ------------ ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,616 41,532 56,893
-------------- ------------ ----------
INVESTING ACTIVITIES:
Cash and cash equivalents of subsidiaries acquired, 369 (15,474)
net of purchase price
Proceeds from the maturity of investment securities 387,493 348,182 176,782
available for sale
Proceeds from the sale of investment securities available 1,182,087 744,338 430,092
for sale
Purchase of investment securities available for sale (1,504,051) (1,330,300) (618,529)
Proceeds from the maturity of investment securities 16,756 19,118 78,716
held to maturity
Purchase of investment securities held to maturity (56,277) (93,043)
Net increase in loans (315,886) (426,325) (119,487)
Purchase of premises and equipment (17,239) (13,200) (10,994)
-------------- ------------ ----------
NET CASH USED IN INVESTING ACTIVITIES (250,840) (714,095) (171,937)
-------------- ------------ ----------
FINANCING ACTIVITIES:
Net increase in deposits 20,357 263,886 211,281
Net increase in short-term borrowings 62,838 389,697 46,801
Payment and maturity of long-term debt (77,838) (170,793) (199,830)
Proceeds from long-term borrowings 215,151 191,965 144,549
Proceeds from issuance of common stock 13,184
Contribution to fund ESOP 379 211 125
Payment of cash dividends (27,174) (24,475) (19,950)
Proceeds from common stock issued for dividend 1,816 3,560 3,093
reinvestment plan
Proceeds from exercise of stock options 10,632 1,004 1,815
Purchase and retirement of common stock (37,552) (16,890) (26,264)
-------------- ------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 168,609 638,165 174,804
-------------- ------------ ----------
NET INCREASE (DECREASE) IN CASH AND (61,615) (34,398) 59,760
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT JANUARY 1, 238,975 273,373 213,613
-------------- ------------ ----------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, $ 177,360 $ 238,975 $ 273,373
============== ============ ==========
Supplemental disclosure:
Cash paid for:
Interest $ 264,063 $ 232,725 $ 191,872
Income taxes 34,168 24,112 29,618
Non-cash investing and financing activities:
Common stock issued for acquisitions 6,286 27,603
Stock issued in exchange of debentures 5,740 2,638 313
and equity contracts
See notes to supplemental consolidated financial statements.
</TABLE>
Page 5
NOTES TO SUPPLEMENTAL 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 supplemental 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.
Effective April 17, 1998, the Corporation acquired Pinnacle Financial
Services, Inc. (Pinnacle), in a transaction accounted for as a pooling of
interests. The supplemental consolidated financial statements give
retroactive effect to the transaction and, as a result, the supplemental
consolidated balance sheet, statement of income and statement of cash flows
are presented as if the Corporation and Pinnacle had been consolidated for all
periods presented. As required by generally accepted accounting principles,
the supplemental consolidated financial statements will become the historical
consolidated financial statements upon issuance of the financial statements
for the period that includes the date of the transaction. The supplemental
consolidated statement of changes in shareholders' equity reflects the
accounts of CNB Bancshares, Inc. as if the common stock issued in the Pinnacle
acquisition had been outstanding during all periods presented. The
supplemental consolidated financial statements, including the notes thereto,
should be read in conjunction with the historical consolidated financial
statements of the Corporation included in its December 31, 1997 Annual Report
on Form 10-K.
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. Servicing fee income subsequent to the sale is included in
non-interest income. Mortgage servicing rights associated with loans
originated and sold, where servicing is retained, are capitalized 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 trading or available for
sale and reported at fair value with unrealized gains and losses included in
income or shareholders' equity, net of related taxes, respectively.
Page 6
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. A decline in the fair value of any
available for sale or held to maturity security below cost that is deemed
other that temporary results in a charge to earnings thereby establishing a
new cost basis for the security.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are reported net of unearned interest, unamortized deferred fees and
costs. Interest income on loans is accrued on the principal amount of such
loans outstanding, except for leases and discounted installment loans which is
computed using the level yield method. 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 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 adjustments to value
and gains or losses on sales are included in operations. Rental income and
costs of maintaining the properties are also included in operations.
Page 7
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.
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 interest rate 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 interest rate 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 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.
NET INCOME PER SHARE
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding during each period.
Diluted net income per share computation is as above, adjusted for the effects
of options and convertible subordinated debentures. Diluted net income has
been adjusted for the elimination of interest expense, net of tax, on
convertible subordinated debentures and average shares have been increased for
the assumed conversion of outstanding options and convertible subordinated
debentures into common shares. All share data included in the supplemental
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
Page 8
1, 1996, the Corporation adopted Financial Accounting Standards Board
(FASB) Statement 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 net income 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 supplemental consolidated financial
statements as such items are not assets of the Corporation or its
subsidiaries. Fee income related to fiduciary or agency activity is
recognized on an accrual basis for financial reporting purposes.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of comprehensive
income and its components. In June 1997, the FASB also 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. In addition, in February
1998, the FASB issued Statement No. 132, Employers' Disclosure about Pensions
and other Postretirement Benefits, which established standards for disclosing
information about pensions and other postretirement benefits. 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
2. BUSINESS COMBINATIONS
As described in Note 1, effective April 17, 1998, the Corporation acquired
Pinnacle, a $2,115,000 asset bank holding company headquartered in St. Joseph,
Michigan. The consideration for the acquisition was 13,116,165 shares of the
Corporation's common stock (based on the exchange ratio of 1.0365 shares of the
Corporation's common stock for each share of Pinnacle common stock). The
Pinnacle acquisition was accounted for as a pooling of interests. Separate
operating results for the Corporation and Pinnacle prior to merger were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------- ------- -------
Corporation:
<S> <C> <C> <C> <C>
Net income $49,658 $37,595 $36,626
Net income per share:
Basic $ 2.42 $ 1.81 $ 1.78
Diluted $ 2.37 $ 1.78 $ 1.74
Pinnacle:
Net income $10,216 $16,087 $16,221
Net income per share:
Basic $ 0.83 $ 1.33 $ 1.60
Diluted $ 0.83 $ 1.32 $ 1.58
</TABLE>
The Corporation expects to record one-time merger related charges of
approximately $41,300 (approximately $30,000 after tax) in the second quarter
of 1998 in connection with the merger with Pinnacle. The charges include
$8,300 in technology-related costs, $9,700 in severence pay and other personnel
related expenses, $6,700 for professional fees, $11,200 to conform the
accounting policies of Pinnacle to those of the Corporation, and $5,400 in other
costs.
Page 10
Information relating to mergers completed by the Corporation and
Pinnacle accounted for as poolings of interests for the three year period ended
December 31, 1997, includes:
<TABLE>
<CAPTION>
MERGER COMMON SHARES
DATE ISSUED ACQUIRED
----------------- ------------- --------
<S> <C> <C> <C> <C>
Indiana Federal Corporation, (IFC)
Valparaiso, Indiana August 1, 1997 4,965,598 $835,000 (1)
CB Bancorp, Inc., (CB)
Michigan City, Indiana August 1, 1997 1,609,834 288,000 (1)
BMC Bancshares, Inc.,
Mt. Carmel, Illinois February 14, 1997 754,810 100,041 (2)
Starke's, Inc, St. Joseph, Michigan October 1, 1996 103,081 1,241 (1)(2)
DuQuoin Bancorp, Inc.,
DuQuoin, Illinois May 17, 1996 550,368 84,357
Southern Finance Co., Inc.,
Madisonville, Kentucky December 1, 1995 35,205 2,432
Service Financial, Inc.,
Harriman, Tennessee December 1, 1995 40,863 1,924
UF Bancorp, Inc., Evansville, Indiana August 4, 1995 2,613,154 564,755
Bank of Orleans, Indiana August 4, 1995 368,698 58,576 (2)
Harrisburg Bancshares, Inc.,
Harrisburg, Illinois February 10, 1995 556,047 110,467
King City Federal Savings Bank,
Mt. Vernon, Illinois February 1, 1995 755,288 176,494
</TABLE>
Certain of the above entities have had their name changed and/or have
been merged into other subsidiaries of the Corporation.
(1) Entity was acquired by Pinnacle prior to Pinnacle being acquired by the
Corporation.
(2) 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.
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 $6,375 and is being amortized on a straight-line
basis over periods not exceeding 15 years. These acquisitions were accounted
for under the purchase method of accounting, and accordingly, the supplemental
consolidated financial statements include the assets and liabilities and
results of operations from the May 31, 1996 transaction date forward.
On August 4, 1995, the Corporation 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 supplemental
consolidated financial statements include the assets and liabilities and
results of operations from the August 4, 1995 transaction date forward.
During the three years ended December 31, 1997, through the former
Pinnacle, the Corporation completed two additional acquisitions. On December
1, 1995, the Corporation acquired all of the outstanding stock of Maco
Bancorp, Inc. (Maco), a Delaware corporation and registered savings and loan
holding company headquartered in Merrillville, Indiana, for $20,959 in cash
and the equivalent of 1,232,351 shares of Corporation common stock. At the
date of acquisition, Maco had total assets of
Page 11
$413,000 and total liabilities of $384,000. Goodwill of $13,350 resulting from
the acquisition of Maco is being amortized on a straight-line basis over 15
years. The operating results of Maco have been included in the Corporation's
supplemental consolidated financial statements since the date of acquisition.
On January 31, 1995, the Corporation acquired for $8,200, NCB Corporation (NCB),
a bank holding company with total assets of approximately $45,000 with offices
in Culver and Granger, Indiana. The acquisition of NCB was accounted for as a
purchase with goodwill resulting from the acquisition of $1,500 being amortized
on a straight-line basis over 15 years. The operating results of NCB have been
included in the Corporation's supplemental consolidated financial statements
since the date of acquisition.
On January 1, 1998, the Corporation issued 109,800 shares of common stock
for the acquisition of Wedgewood Partners, Inc., a full service broker/dealer
and asset management firm based in St. Louis, Missouri. Goodwill of $2,345 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 will include the assets and liabilities and
results of operations from the January 1, 1998 transaction date forward.
On February 13, 1998, the Corporation signed a definitive agreement to
acquire all of the outstanding shares of National Bancorp of Tell City,
Indiana. Under terms of the agreement, the Corporation will issue
approximately 1,118,000 shares of its common stock. The transaction will be
accounted for as a pooling of interests and is subject to approval by
shareholders of National Bancorp and applicable regulatory agencies. Although
the Corporation anticipates that the merger will be consummated during the
third quarter of 1998, there can be no assurances that the acquisition will be
completed. At December 31, 1997, National Bancorp had total assets and
shareholders' equity of $191,287 and $17,850, respectively.
3. MORTGAGE BANKING ACTIVITIES
The Corporation has sold certain loans to various investors while retaining
servicing rights. Loans serviced for others totaled $1,083,192 and $1,078,387
at December 31, 1997 and 1996, respectively, and are not included in the
accompanying supplemental consolidated financial statements. Changes in
mortgage servicing rights for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Balance at January 1, $3,846 $ 663
Mortgage servicing rights capitalized 1,979 3,791
Amortization (978) (608)
------- -------
Balance at December 31, $4,847 $3,846
======= =======
</TABLE>
The components of mortgage banking revenue were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Gains on sales and securitizations of mortgage
loans $5,551 $ 7,776 $2,341
Gain on sale of mortgage servicing rights 2,600
Mortgage loan fees 1,602 1,051 918
Mortgage servicing fees, net of amortization 2,664 2,256 2,348
------ ------- ------
Mortgage banking revenue $9,817 $11,083 $8,207
====== ======= ======
</TABLE>
Page 12
INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ------------ ----------
Available for Sale at December 31, 1997:
<S> <C> <C> <C> <C>
U.S. Treasury $ 25,227 $ 230 $ (1) $ 25,456
Federal agencies:
Bonds and notes 334,325 774 (616) 334,483
Mortgage-backed securities 1,177,148 8,322 (906) 1,184,564
Collateralized mortgage obligations 120,894 891 (2,360) 119,425
State and municipal 125,736 4,338 (35) 130,039
Other securities 59,752 419 (91) 60,080
---------- ----------- ------------ ----------
Total $1,843,082 $ 14,974 $ (4,009) $1,854,047
---------- ----------- ------------ ----------
Held to Maturity at December 31, 1997:
Federal agencies:
Mortgage-backed securities $ 68,867 $ 113 $ (807) $ 68,173
Collateralized mortgage obligations 24,535 (142) 24,393
State and municipal 137,501 6,295 (120) 143,676
-------- ------ -------- --------
Total $230,903 $6,408 $(1,069) $236,242
-------- ------ -------- --------
Available for Sale at December 31, 1996:
U.S. Treasury $ 25,415 $ 131 $ (174) $ 25,372
Federal agencies:
Bonds and notes 398,365 1,277 (1,766) 397,876
Mortgage-backed securities 1,151,808 5,142 (7,909) 1,149,041
Collateralized mortgage obligations 178,848 802 (1,156) 178,494
State and municipal 79,529 1,844 (225) 81,148
Other securities 61,434 186 (193) 61,427
---------- ------ --------- ----------
Total $1,895,399 $9,382 $(11,423) $1,893,358
---------- ------ --------- ----------
Held to Maturity at December 31, 1996:
Federal agencies:
Bonds and notes $3,000 $ $(48) $2,952
Mortgage-backed securities 86,410 209 (1,816) 84,803
Collateralized mortgage obligations 29,989 (409) 29,580
State and municipal 140,199 3,726 (555) 143,370
Other securities 2,789 6 (2) 2,793
-------- ------ -------- --------
Total $262,387 $3,941 $(2,830) $263,498
-------- ------ -------- --------
</TABLE>
The carrying value of investment securities at December 31, 1997, 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.
Page 13
MATURITIES AND AVERAGE YIELDS OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT
DECEMBER 31, 1997*
<TABLE>
<CAPTION>
1 Year or Less 1-5 Years 5-10 Years Over 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
---------------- ------ ----------- ------ ------------ ------ --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 9,046 5.75% $ 5,017 5.69% $ 11,393 5.79% $
Federal agencies:
Bonds and notes 1,525 5.68 23,455 6.72 $ 233,781 7.08 75,722 7.52%
Mortgage-backed securities 214,315 6.97 511,930 6.96 242,511 6.93 215,808 7.19
Collateralized mortgage 14,890 6.94 32,478 6.82 13,162 6.71 58,895 6.77
obligations
State and municipal 6,727 8.89 16,988 7.94 15,018 6.75 91,306 7.09
Other securities 31,108 7.83 1,992 6.13 241 5.87 26,739 7.23
---------------- ----------- ------------ ---------------
Total $ 277,611 7.07% $ 591,860 6.95% $ 516,106 6.96% $ 468,470 6.38%
============================================================================================
Percent of total 15% 32% 28% 25%
============================================================================================
Total
Amount Yield
----------- ------
<S> <C> <C>
U.S. Treasury $ 25,456 5.76%
Federal agencies:
Bonds and notes 334,483 7.15
Mortgage-backed securities 1,184,564 7.00
Collateralized mortgage 119,425 6.80
obligations
State and municipal 130,039 7.26
Other securities 60,080 7.50
-----------
Total $1,854,047 7.02%
===================
Percent of total 100%
===================
</TABLE>
MATURITIES AND AVERAGE YIELDS OF INVESTMENT SECURITIES HELD TO MATURITY AT
DECEMBER 31, 1997*
<TABLE>
<CAPTION>
1 Year or Less 1-5 Years 5-10 Years Over 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
---------------- ------ ----------- ------ ------------ ------ --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agencies:
Mortgage-backed securities $ 13,856 6.18% $ 37,418 6.10% $ 14,496 6.22% $ 3,097 6.46%
Collateralized mortgage 5,255 5.03 12,574 5.03 5,046 5.06 1,660 5.11
obligations
State and municipal 697 7.78 23,192 8.81 50,582 7.90 63,030 7.90
---------------- ----------- ------------ ---------------
Total $ 19,808 5.93% $ 73,184 6.77% $ 70,124 7.35% $ 67,787 7.77%
============================================================================================
Percent of total 9% 32% 30% 29%
============================================================================================
Total
Amount Yield
--------- ------
<S> <C> <C>
Federal agencies:
Mortgage-backed securities $ 68,867 6.16%
Collateralized mortgage 24,535 5.04
obligations
State and municipal 137,501 8.05
---------
Total $230,903 7.17%
=================
Percent of total 100%
=================
* Fully taxable equivalent yields.
</TABLE>
Specific investment securities with carrying values of $600,823 and
$989,537 were pledged at December 31, 1997 and 1996, respectively, to secure
securities sold under repurchase agreements, public deposits, trust funds and
for other purposes as required or permitted by law. In addition, investment
securities with a carrying value of $847,540 were pledged at December 31, 1997
under blanket collateral agreements to secure borrowing availability with the
Federal Home Loan Bank.
Proceeds from the sales of investment securities available for sale
during 1997, 1996 and 1995 were $1,182,097, $744,338 and $430,092,
respectively. Gross gains and losses, respectively, realized on those
transactions were as follows: 1997 - $4,513 and ($2,390); 1996 - $3,453 and
($1,249); and 1995 - $5,324 and ($2,253).
Page 14
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Through its subsidiaries, the Corporation originates commercial, mortgage and
consumer loans from customers located in its primary market areas of Indiana,
Illinois, Kentucky, Michigan 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.
Loans outstanding at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial, industrial and agricultural production $1,134,718 $ 971,519
Tax exempt 35,070 31,442
Real estate mortgage:
Commercial and agricultural 514,966 433,894
Construction 158,111 120,115
Residential 1,373,782 1,409,202
Consumer 784,891 738,236
Less: Unearned income 13,522 13,464
---------- ----------
Loans, net of unearned income $3,988,016 $3,690,944
========== ==========
</TABLE>
Impaired loans totaled $42,097 and $31,472 at December 31, 1997 and 1996,
respectively. Included in the impaired loans total as of the same year-end
dates were $26,035 and $20,720 of impaired loans for which the related
specific allowance for loan losses were $5,159 and $3,253. The remaining
$16,062 and $10,752 of impaired loans did not require a specific reserve.
Impaired loans averaged $32,955 and $26,231 for 1997 and 1996, respectively.
The Corporation recognized $1,345, $866 and $609 of interest income on
impaired loans in 1997, 1996 and 1995, respectively.
Loans on which the accrual of interest was discontinued or reduced
amounted to $27,974 at December 31, 1997, and $33,579 at December 31, 1996.
Additional interest income of approximately $2,615 for 1997, $2,799 for 1996,
and $2,086 for 1995, would have been recorded had income on these loans been
accounted for on the accrual basis.
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses:
Balance at January 1, $ 46,171 $ 43,259 $ 40,889
Allowance of companies acquired 1,872 2,624
Adjustment due to change in fiscal year end
of pooled entity 501
Loan charge-offs (19,703) (16,349) (11,075)
Loan recoveries 3,367 4,106 2,472
Provision for loan losses 24,886 13,283 8,349
--------- --------- ---------
Balance at December 31, $ 55,222 $ 46,171 $ 43,259
--------- --------- ---------
</TABLE>
Page 15
6. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Cost at December 31:
Land $ 15,586 $ 14,932
Buildings and leasehold improvements 104,166 103,215
Equipment 74,717 68,426
--------- ---------
Total cost 194,469 186,573
Accumulated depreciation (90,167) (89,023)
--------- ---------
Net $104,302 $ 97,550
========= =========
</TABLE>
7. DEPOSITS
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Deposits at December 31:
Non-interest bearing checking $ 464,596 $ 480,381
Interest bearing checking 580,909 563,484
Savings 611,709 600,089
Money market 449,563 397,979
Certificates of $100 or more 362,152 339,635
Other certificates and time deposits 2,145,626 2,211,873
---------- ----------
Total $4,614,555 $4,593,441
========== ==========
</TABLE>
The Corporation receives deposits from customers located in its primary
market areas of Indiana, Illinois, Kentucky and Michigan, and generally does
not accept brokered deposits and has no significant concentrations of deposits
from any one customer or industry. The scheduled maturities of certificates
and other time deposits at December 31, 1997, was as follows: 1998 -
$1,667,601; 1999 - $526,810; 2000 - $208,495; 2001 - $39,687; 2002 - $37,963;
2003 and after - $27,222.
Interest expense on time deposits of $100 or more was $19,598, $15,912
and $11,915 for 1997, 1996 and 1995, respectively.
Page 16
8. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Securities
Sold Under Federal Other
Repurchase Funds Short-Term
<S> <C> <C> <C> <C>
1997 Agreements Purchased Borrowings Total
- -----------------------------------------------------------------------------------------------
Balance at December 31 $ 586,855 $ 57,380 $ 36,840 $681,075
Average amount outstanding during the year 640,426 70,937 9,224 720,587
Maximum amount outstanding at any month-end 700,534 124,610 36,840
Weighted average interest rate:
During year 5.27% 5.66% 5.38% 5.32%
End of year 5.45 5.94 5.65 5.50
1996
- -----------------------------------------------------------------------------------------------
Balance at December 31 $ 562,364 $ 91,630 $ 7,878 $661,872
Average amount outstanding during the year 440,465 64,817 6,105 511,387
Maximum amount outstanding at any month-end 562,364 126,120 16,252
Weighted average interest rate:
During year 5.06% 5.47% 4.46% 5.11%
End of year 4.98 6.12 4.76 5.14
1995
- -----------------------------------------------------------------------------------------------
Balance at December 31 $ 347,081 $ 25,370 $ 7,441 $379,892
Average amount outstanding during the year 331,035 37,108 7,600 375,743
Maximum amount outstanding at any month-end 357,092 53,590 14,136
Weighted average interest rate:
During year 5.43% 5.93% 5.57% 5.48%
End of year 5.09 5.54 4.88 5.09
</TABLE>
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
- -----------------------------------------------------------------------------------------------------------
Long-term debt of the parent company and its subsidiaries as of December 31:
Parent Company:
Notes payable, unsecured:
Variable rate adjusted with changes in LIBOR, due in 1999
(6.47% at December 31, 1997) $ 35,000
Variable rate adjusted with changes in LIBOR, payable $250 quarterly
through 2000 (6.47% and 6.16% at December 31, 1997 and 1996, respectively) 3,500 $ 4,500
9.81%, paid in 1997 2,400
Convertible subordinated debentures, 7.50%, redeemed October 1997 6,029
Subsidiaries:
Federal Home Loan Bank advances, due at various dates through 2016 (weighted
average rates of 5.68% and 5.71% at December 31, 1997 and 1996, respectively) 677,979 527,878
Other, including capitalized leases 5,914 5,161
-------- --------
Total $722,393 $545,968
======== ========
</TABLE>
The scheduled principal reduction of long-term debt at December 31, 1997,
was as follows: 1998 - $368,339; 1999 - $168,334; 2000 - $96,831; 2001 -
$10,280; 2002 -$45,296; 2003 and after - $33,313. Certain notes permit
earlier principal payments without penalty.
Page 17
Qualifying, unencumbered mortgage assets up to 170% of the aggregate
amount of advances and Federal Home Loan Bank stock have been pledged as
collateral for the Federal Home Loan Bank advances.
At December 31, 1997, the Corporation had $264,000 available from unused
federal funds purchased agreements and in excess of $271,635 of available
borrowing capacity from the Federal Home Loan Bank. In addition, the
Corporation has an unsecured line of credit available which permits it to
borrow up to $50,000 at variable rates adjusted with changes in LIBOR through
June 30, 1999. At December 31, 1997, $15,000 remained available for future
use.
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-twenty stock
dividends declared on October 18, 1995, September 10, 1996 and August 11,
1997. 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. The Plan provides for
shares to be purchased in the market or to be issued by the Corporation. At
December 31, 1997, there were 667,976 shares of common stock reserved for
issuance under the Plan. Shares issued pursuant to the Plan totaled 49,523,
138,592 and 125,856 for 1997, 1996 and 1995, respectively.
The Corporation called its convertible subordinated debentures effective
October 3, 1997. The Corporation issued 351,547 shares in 1997, 29,687 shares
in 1996 and 14,410 shares in 1995 in connection with the conversion of these
debentures.
Cancelable mandatory stock purchase contracts were called effective
August 15, 1996. The Corporation issued 151,590 shares in 1996 and 5,791
shares in 1995, in connection with the exercise of these stock purchase
contracts.
The Corporation has stock options outstanding under various plans at
December 31, 1997, including plans assumed in the Pinnacle merger. The
Corporation has Incentive Stock Option Plans (Plans), whereby up to 1,684,000
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 or greater vesting period. Options
granted pursuant to the Plans generally 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, 1997, 312,622 shares were available for the granting of
additional options.
The former Pinnacle had a non-qualified stock option plan which had
awarded options to certain key employees at December 31, 1997. All options
have five year terms and vest and become fully exercisable after five years
from the date of grant. Also, the former IFC awarded incentive and non-
qualified stock options to certain former directors, officers and key
employees. All options granted have 10 year terms and vest and become fully
exercisable over a five year period from the grant date. In addition, the
former CB had a stock option plan for outside directors. The option exercise
price was required to be at least 100% of the fair market value of the common
stock on the date of the grant,
Page 18
and the option term not exceeding 10 years. Eligible directors may exercise
100% of the options awarded to them.
The fair value of option grants, excluding options from Pinnacle, was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate 6.38% 6.83% 6.06%
Dividend yield 2.50 3.20 3.20
Volatility 20.00 14.00 16.00
Expected option life 5 YEARS 7 years 7 years
</TABLE>
The fair value of Pinnacle's option grants was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate 6.50% 6.50% 6.50%
Dividend yield 3.75 3.75 3.75
Volatility 30.60 34.10 34.10
Expected option life 3.5 YEARS 3.5 years 3.5 years
</TABLE>
For purposes of pro forma disclosures, if the estimated fair value of all
options is amortized to expense over the options vesting period, the effect on
net income and net income per share would be:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported $59,874 $53,682 $52,847
Pro forma 58,767 52,701 52,032
Basic net income per share:
As reported $ 1.80 $ 1.61 $ 1.70
Pro forma 1.77 1.58 1.68
Diluted net income per share:
As reported $ 1.78 $ 1.59 $ 1.67
Pro forma 1.74 1.55 1.63
</TABLE>
A summary of the option transactions under the Plans and other options
assumed by the Corporation as a result of certain mergers is presented below:
Page 19
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
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, 1,172,494 $ 18.51 1,065,317 $ 15.30 1,140,895 $ 11.49
Granted or assumed 571,112 37.83 302,503 23.34 298,293 20.62
Exercised (552,169) 16.45 (171,631) 7.75 (329,567) 7.22
Forfeited (22,048) 29.45 (23,695) 3.50 (44,304) 12.90
---------- ---------- ----------
Outstanding at December 31, 1,169,389 $ 28.71 1,172,494 $ 18.51 1,065,317 $ 15.30
================================================================
Exercisable at December 31, 741,619 $ 22.75 848,759 $ 18.52 629,810 $ 15.54
================================================================
</TABLE>
The following table summarizes stock options outstanding as of
December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
Range of Outstanding Remaining Contractual Weighted Average
Exercise Price Life (Years) Exercised Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$6.00 - $18.00 179,462 5.8 $13.69
18.01 - 31.00 535,625 6.9 24.22
31.01 - 41.00 454,302 8.3 39.95
-----------
1,169,389 7.3 28.71
-----------
</TABLE>
The following table reconciles the numerators and denominators for basic
and diluted net income per share:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
NUMERATOR:
For basic net income per share - Net income $ 59,874 $ 53,682 $ 52,847
Effect of dilutive securities:
7.50% Convertible subordinated debentures 178 289 307
--- --- ---
For diluted net income per share - Net income
after assumed conversions $ 60,052 $ 53,971 $ 53,154
----------- ----------- -----------
DENOMINATOR (SHARES IN THOUSANDS):
For basic net income per share - Average shares
outstanding 33,258 33,280 31,034
Effect of dilutive securities:
7.50% Convertible subordinated debentures 236 368 387
Stock options 307 277 420
----------- ----------- -----------
For diluted net income per share - Average shares
outstanding after assumed conversions 33,801 33,925 31,841
----------- ----------- -----------
</TABLE>
Page 20
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 $580, $713 and $370 for 1997, 1996 and 1995, respectively, and
included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service costs-benefits earned during the period $ 2,392 $ 2,191 $ 1,672
Interest costs on projected benefit obligation 2,844 2,687 2,364
Return on plan assets (4,287) (4,127) (3,977)
Net amortization and deferral (369) (38) 311
-------- -------- --------
Net pension expense $ 580 $ 713 $ 370
======== ======== ========
</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 supplemental consolidated balance sheet at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested $ 33,420 $ 31,245 $ 27,608
Nonvested 1,514 663 1,970
Provision for future salary increases 1,976 2,580 1,969
--------- --------- ---------
Total $ 36,910 $ 34,488 $ 31,547
--------- --------- ---------
Plan assets at fair value, primarily marketable securities $ 59,058 $ 51,732 $ 44,730
Actuarial present value of projected benefit obligation (43,234) (39,640) (36,594)
--------- --------- ---------
Excess of plan assets over projected benefit obligation 15,824 12,092 8,136
Unrecognized net transition asset (2,038) (2,302) (2,577)
Unrecognized net (gain) loss (5,775) (2,152) 1,491
Unrecognized prior service cost (1,401) (992) (1,017)
--------- --------- ---------
Prepaid pension expense included in other assets $ 6,610 $ 6,646 $ 6,033
--------- --------- ---------
</TABLE>
Plan assets consist primarily of investments in U.S. Government agency
and corporate debt obligations and collective investment and mutual funds. At
December 31, 1997, the plans held 139,085 common shares of the Corporation.
Range of assumptions used in determining the projected benefit
obligations and net pension expense were:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ---------------
<S> <C> <C> <C>
Discount rate 7.25 - 7.50 % 7.50 % 7.50 - 7.75 %
Rate of increase in compensation levels 4.25 - 5.50 4.25 - 5.50 4.25 - 6.00
Expected long-term rate of return on plan assets 9.00 - 10.00 9.00 - 10.00 9.00 - 10.00
</TABLE>
Page 21
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 $1,090, $1,026 and $915 for 1997, 1996 and 1995, respectively.
The former Pinnacle, IFC and CB and had various additional employee benefit
plans in effect, the most significant of which are summarized as follows:
* The former Pinnacle sponsored a defined contribution 401(k) plan whereby
employee contributions were matched based upon Pinnacle's operating
results. Contributions were $128, $63 and $121 for 1997, 1996 and 1995,
respectively.
* The former IFC and CB each maintained a supplemental retirement plan for
certain executives. Each plan required acceleration of funding of
benefits upon change of control for certain participants, which were met
by the merger with the former Pinnacle on August 1, 1997. The amounts
charged to expense related to the supplemental retirements plans were
$1,422, $269 and $69 for 1997, 1996 and 1995, respectively.
* The former IFC and CB each maintained an employee stock ownership plan
in which all employees who attained minimum age and service
requirements were eligible to participate. The amounts charged to
expense related to the employee stock ownership plans were $917, $342
and $471 for 1997, 1996 and 1995, respectively. Each of the employee
stock ownership plans were terminated during 1997 upon repayment of the
loan and the allocation of all remaining shares to participants.
* The former IFC sponsored a stock-based, director deferred compensation
plan for former directors which allowed deferral of fees for the
purchase of phantom units of the IFC's common stock. The amounts
charged to expense related to the plan were $925, $157 and $162 in
1997, 1996 and 1995, respectively.
The Corporation generally does not provide post retirement benefits other
than pensions nor does it have any material liabilities for post employment
benefits.
Page 22
12. INCOME TAXES
1997 1996 1995
- ----------------------------------------------------------------------
Income taxes:
Currently payable:
Federal $28,310 $23,481 24,108
State 4,357 5,408 5,439
Deferred (benefit) expense:
Federal (3,124) (1,642) (1,742)
State 146 (234) (240)
-------- -------- --------
Total income taxes $29,689 $27,013 $27,565
-------- -------- --------
1997 1996 1995
- ----------------------------------------------------------------------
Reconciliation of federal statutory tax
to actual income tax expense:
Federal income tax at applicable
statutory rate (35%) $31,347 $28,243 28,144
Tax exempt interest (4,488) (3,566) (2,633)
State tax, net of federal tax benefit 2,927 3,309 3,410
Other (97) (973) (1,356)
-------- -------- --------
Income tax expense $29,689 $27,013 $27,565
-------- -------- --------
Effective rate 33% 33% 34%
-------- -------- --------
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and liabilities at December 31 were as
follows:
Page 23
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Deferred tax assets:
Unrealized losses on investment securities available for sale $ $ 756
Allowance for loan losses 19,139 13,767
Deferred compensation 3,292 1,304
Capital loss and tax credit carryforward 887
Unearned fees and commissions 1,322 1,275
Accrued expenses 1,168 1,635
Other 1,313 2,292
------- --------
Total deferred tax assets 26,234 21,916
Deferred tax liabilities:
Unrealized gains on investment securities available for sale 4,316
Deposit base premuim 759 1,007
Deferred loan fees and costs 2,046 992
Depreciation 4,689 4,356
Prepaid pension 2,815 2,595
Purchase discount 1,420 1,369
Leasing operations 1,359 212
Mortgage servicing rights 1,611 1,287
Other 1,799 2,584
------- --------
Total deferred tax liabilities 20,814 14,402
------- --------
Net deferred tax asset $ 5,420 $ 7,514
======= ========
</TABLE>
No valuation allowance was required for the years reported 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.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is committed under various operating leases for premises and
equipment. Future minimum rentals for lease commitments having initial or
remaining non-cancelable lease terms in excess of one year totaled $11,400 at
December 31, 1997. Rental expense for operating leases totaled $3,234, $2,770
and $1,946 in 1997, 1996 and 1995, 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 supplemental consolidated balance sheet.
Page 24
At December 31, those financial instruments whose contract amount
represents credit and/or interest rate risk are summarized in the following
table:
1997 1996
- ------------------------------------------------
[S] [C] [C]
Commitments to extend credit $622,079 $738,855
Standby letters of credit 78,695 52,530
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 specified benefits under certain conditions. The contingent
liability under these agreements in the event of a change in control is
approximately $12,380.
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: 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, 1997 and 1996, the notional amount of the interest rate
caps was $390,000 and $285,000, respectively. The caps are indexed to LIBOR
with contract strike prices ranging from 5.50% to 6.00% and mature prior to
2000. The caps had a carrying value of $2,095 and $1,753 at December 31, 1997
and 1996, respectively, and related market values of $989 and $934.
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 both December 31,
1997 and 1996, the Corporation had swaps with a notional value of $55,000.
The market value of the swaps was ($39)
Page 25
and ($363) at December 31, 1997 and 1996, respectively. This negative fair
value represents the estimated amount the Corporation would have to pay at each
date to cancel the contracts or transfer them to other parties. 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.
15. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Corporation has loan, deposit and
other transactions with executive 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:
- ------------------------------------------------
Balance at January 1, 1997 $52,999
New loans, including renewals 20,916
Director and officer change (3,665)
Payments, including renewals (6,934)
--------
Balance at December 31, 1997 $63,316
--------
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 1998, 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 1998 net
income and $76,611 (the amount available at December 31, 1997). As a
practical matter, the banking subsidiaries may restrict dividends to a lesser
amount because of the need to maintain adequate capital levels.
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 subsidiary banks. The reserves required at December 31, 1997,
were $32,008.
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.
Page 26
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 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital to average assets (as defined). Management
believes, that as of December 31, 1997, the Corporation and its banking
subsidiaries met all capital adequacy requirements to which they were subject.
As of December 31, 1997, 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
1 risk-based, and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the subsidiary banks' categories.
The Corporation's and its significant subsidiary banks' actual and
minimum required capital amounts and ratios as mandated by the respective
principal federal regulatory authority at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
REQUIREMENTS
MINIMUM TO BE CLASSIFIED AS
ACTUAL REQUIREMENTS "WELL CAPITALIZED"
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------------- ----- -------------------- ------
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL (to risk-weighted assets):
Corporation $518,126 12.72% $ 325,761 8.00% N/A N/A
The Citizens National Bank of
Evansville 164,217 12.48 105,271 8.00 $131,589 10.00%
Pinnacle Bank 149,193 12.25 97,412 8.00 121,765 10.00
TIER 1 CAPITAL (to risk-weighted assets):
Corporation 467,807 11.48 162,880 4.00 N/A N/A
The Citizens National Bank of
Evansville 151,016 11.48 52,635 4.00 78,953 6.00
Pinnacle Bank 133,907 11.00 48,706 4.00 73,059 6.00
TIER 1 CAPITAL (to average assets):
(also known as leverage ratio)
Corporation 467,807 7.01 266,713 4.00 N/A N/A
The Citizens National Bank of
Evansville 151,016 7.06 85,555 4.00 106,944 5.00
Pinnacle Bank 133,907 6.44 83,183 4.00 103,998 5.00
</TABLE>
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 imposes on
one entity a contractual obligation to deliver cash or another financial
instrument to a second entity or, 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.
Page 27
The estimated fair values of the Corporation's financial instruments at
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 177,360 $ 177,360 $ 238,975 $ 238,975
Investment securities available for sale 1,854,047 1,854,047 1,893,358 1,893,358
Investment securities held to maturity 230,903 236,242 262,387 263,498
Net loans (including loans held for sale) 3,983,617 4,031,375 3,662,715 3,692,913
Interest receivable 46,902 46,902 46,641 46,641
Financial liabilities:
Deposits (4,614,555) (4,630,997) (4,593,441) (4,601,979)
Short-term borrowings (681,075) (681,075) (661,872) (661,872)
Interest rate contracts 2,095 989 1,753 934
Long-term debt (722,393) (712,991) (545,968) (549,251)
Interest payable (25,477) (25,477) (22,428) (22,428)
Off-balance sheet financial assets (liabilities):
Commitments to extend credit 2,799 2,827
Interest rate swaps (39) (363)
</TABLE>
The carrying amounts of cash and cash equivalents are reasonable
estimates of their fair values. The fair values of 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, 1997, and December 31, 1996, 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 28
18. SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Presented below is supplemental condensed financial information as to
financial position, results of operations and cash flows of the Corporation
(Parent Company only).
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
SUPPLEMENTAL CONDENSED BALANCE SHEET 1997 1996
- ---------------------------------------------------------------------- ------------- --------
Assets
Cash on deposit with subsidiaries $ 10,631 $ 3,014
Interest-bearing deposits 6,076
Securities purchased under repurchase agreements with subsidiaries 6,500 8,000
------------- --------
Total cash and cash equivalents 17,131 17,090
Investment in subsidiaries 523,763 484,999
Premises and equipment 2,044 1,282
Other assets 19,583 10,835
------------- --------
Total assets $ 562,521 $514,206
------------- --------
Liabilities
Accrued expenses $ 8,558 $ 5,604
Long-term debt 38,500 12,929
------------- --------
Total liabilities 47,058 18,533
Shareholders' equity 515,463 495,673
------------- --------
Total liabilities and shareholders' equity $ 562,521 $514,206
------------- --------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
SUPPLEMENTAL CONDENSED STATEMENT OF INCOME 1997 1996 1995
- ------------------------------------------------------------- ------------------------ ------- ---------
Income
Dividends from subsidiaries $ 39,523 $40,750 $ 73,700
Management fees from subsidiaries 8,087 7,100 5,998
Other income 1,694 2,659 1,565
------------------------ ------- ---------
Total income 49,304 50,509 81,263
Expenses
Personnel expense 9,957 8,969 7,116
Interest expense 1,839 1,327 1,433
Other expenses 13,125 6,911 4,974
------------------------ ------- ---------
Total expense 24,921 17,207 13,523
------------------------ ------- ---------
Income before income tax benefit and equity in undistributed
earnings (dividends distributed in excess of earnings) of
subsidiaries 24,383 33,302 67,740
Income tax benefit 4,681 3,172 2,079
------------------------ ------- ---------
Income before equity in undistributed earnings (dividends
distributed in excess of earnings) of subsidiaries 29,064 36,474 69,819
Equity in undistributed earnings (dividends in excess
of earnings) of subsidiaries 30,810 17,208 (16,972)
------------------------ ------- ---------
Net income $ 59,874 $53,682 $ 52,847
------------------------ ------- ---------
</TABLE>
Page 29
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 59,874 $ 53,682 $ 52,847
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 346 223 143
Dividends distributed in excess of earnings
(undistributed earnings) of subsidiaries (30,810) (17,208) 16,972
Increase in other assets (2,607) (591) (1,900)
Increase in other accrued expenses 747 1,647 91
Other, net (13,043) (184) (145)
------------------------- --------- ---------
Net cash provided by operating activities 14,507 37,569 68,008
------------------------- --------- ---------
Investing activities:
Net decrease (increase) in interest bearing deposits with
financial institution 6,076 18,108 (17,610)
Purchase acquisition, net of cash (28,219)
Principal payments received on notes from subsidiaries 14,657 89
Advances on notes to subsidiaries (11,200) (1,642)
Capital contributions (to) from subsidiaries 48 (674) (11,652)
Purchase of premises and equipment (996) (730) (507)
Other, net 1,089 (3,080) (2,058)
------------------------- --------- ---------
Net cash provided by (used in) investing activities 6,217 17,081 (61,599)
------------------------- --------- ---------
Financing activities:
Proceeds from long-term debt 35,000 12,200 36,000
Repayment of long-term debt (3,405) (31,810) (19,100)
Payment of cash dividends (27,174) (24,475) (19,950)
Proceeds from common stock issued for dividend
reinvestment plan 1,816 3,560 3,093
Proceeds from exercise of stock options and stock purchase
contracts 10,632 1,004 1,815
Proceeds from stock offering 13,184
Purchase and retirement of common stock (37,552) (16,890) (26,264)
------------------------- --------- ---------
Net cash used in financing activities (20,683) (56,411) (11,222)
------------------------- --------- ---------
Net increase (decrease) in cash and cash equivalents 41 (1,761) (4,813)
Cash and cash equivalents at January 1, 17,090 18,851 23,664
------------------------- --------- ---------
Cash and cash equivalents at December 31, $ 17,131 $ 17,090 $ 18,851
========================= ========= =========
Supplemental disclosure:
Non-cash investing and financing activities:
Stock issued in exchange of debentures and equity contracts $ 5,740 $ 2,638 $ 313
Common stock issued for acquisitions 6,286 27,603
Capital contribution to subsidiaries 7,650
</TABLE>
Page 30
