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 QUARTERLY PERIOD ENDED
JUNE 30, 1998
CNB BANCSHARES, INC. 0-11510
(Exact name of registrant as specified (Commission file number)
in its charter)
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) 456-3400
(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 August 4, 1998, there were 34,419,586 outstanding shares, without par
value, of the registrant.
Exhibit index is on page 25.
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. . . 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk. . . . . . . . . . . . . . 21
PART II. Other Information. . . . . . . . . . . . . . . . . . 22-23
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Page
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CNB BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except for share data)
(Unaudited)
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
--------- ------------ ---------
<S> <C> <C> <C>
ASSETS
- ------
Cash and due from banks $ 272,936 $ 160,189 $ 172,014
Federal funds sold and other short-term money market investments 10,582 20,773 18,937
---------- ------------- -----------
TOTAL CASH AND CASH EQUIVALENTS 283,518 180,962 190,951
Loans held for sale 156,407 50,823 10,545
Investment securities available for sale 2,010,345 1,854,025 1,990,639
Investment securities held to maturity
(Market value $214,485 at June 30, 1998, $236,242 at
December 31, 1997, and $244,383 at June 30, 1997) 208,964 230,903 242,885
Loans, net of unearned income 3,693,886 3,987,447 3,853,365
Less: Allowance for loan losses 53,738 55,223 47,075
---------- ------------- -----------
NET LOANS 3,640,148 3,932,224 3,806,290
Premises and equipment 98,667 104,420 100,237
Intangible assets 50,219 48,620 50,123
Interest receivable 47,694 46,078 46,710
Other assets 164,458 148,081 117,160
---------- ------------- -----------
TOTAL ASSETS $6,660,420 $ 6,596,136 $6,555,540
========== ============= ===========
LIABILITIES
- -----------
Deposits:
Non-interest bearing $ 590,621 $ 468,438 $ 458,603
Interest bearing 4,101,184 4,146,624 4,140,092
---------- ------------- -----------
TOTAL DEPOSITS 4,691,805 4,615,062 4,598,695
Securities sold under repurchase agreements 501,708 586,855 663,121
Federal funds purchased and other short-term borrowings 113,004 94,220 110,762
FHLB advances and other long-term debt 605,861 726,658 632,896
Interest payable and other liabilities 72,602 57,878 47,783
---------- ------------- -----------
TOTAL LIABILITIES 5,984,980 6,080,673 6,053,257
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
CONVERTIBLE SUBORDINATED DEBENTURES 172,500
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $1 stated value
Shares authorized: 100,000,000
Shares issued: 33,325,213 at June 30, 1998, 33,484,443 at
December 31, 1997, and 32,274,462 at June 30, 1997 33,325 33,484 32,274
Capital surplus 352,356 364,987 331,512
Retained earnings 110,532 110,343 140,808
Accumulated other comprehensive income (loss) - net unrealized
gains (losses) on investment securities available for sale 6,727 6,649 (2,311)
---------- ------------- -----------
TOTAL SHAREHOLDERS' EQUITY 502,940 515,463 502,283
---------- ------------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $6,660,420 $ 6,596,136 $6,555,540
========== ============= ===========
See notes to consolidated financial statements.
</TABLE>
Page 1 of 27
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except for share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees:
Taxable $ 83,463 $ 85,073 $ 170,571 $ 167,007
Tax exempt 554 577 1,094 1,133
Loans held for sale 1,023 198 1,775 292
Investment securities:
Taxable 29,096 35,275 59,837 69,217
Tax exempt 4,453 3,070 8,118 5,988
Federal funds sold and other short-term
money market investments 165 374 282 759
------------ ----------- ----------- -----------
Total interest income 118,754 124,567 241,677 244,396
INTEREST EXPENSE
Deposits 46,367 47,793 93,659 94,703
Short-term borrowings 9,237 9,545 18,275 17,898
FHLB advances and other long-term debt 9,108 9,173 18,586 17,451
------------ ----------- ----------- -----------
Total interest expense 64,712 66,511 130,520 130,052
------------ ----------- ----------- -----------
NET INTEREST INCOME 54,042 58,056 111,157 114,344
Provision for loan losses 1,761 4,086 5,077 7,649
------------ ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 52,281 53,970 106,080 106,695
NON-INTEREST INCOME
Service charges on deposit accounts 6,344 4,866 11,764 9,300
Mortgage banking revenue 5,736 2,047 9,508 3,927
Trust and plan administration fees 2,847 2,342 5,399 4,549
Insurance premiums and commissions 2,868 2,546 6,113 5,107
Investment products fees 1,897 1,535 3,472 3,312
Non-interest fees on loans 1,582 1,777 2,753 3,193
Net securities gains 590 359 1,223 742
Other 4,389 4,149 8,822 7,467
------------ ----------- ----------- -----------
Total non-interest income 26,253 19,621 49,054 37,597
------------ ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 35,762 24,257 60,722 47,909
Data processing and other services 5,330 3,824 8,903 7,516
Occupancy 5,270 3,256 8,933 6,647
Equipment 8,502 2,810 11,809 5,541
Advertising and promotion 2,027 1,573 3,662 3,015
Professional fees 9,741 1,683 11,542 3,337
Postage and freight 1,341 1,191 2,701 2,384
Printing and supplies 1,599 1,140 2,793 2,455
Amortization of intangible assets 1,160 1,122 2,317 2,244
Other 14,260 5,202 19,496 9,045
------------ ----------- ----------- -----------
Total non-interest expense 84,992 46,058 132,878 90,093
------------ ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (6,458) 27,533 22,256 54,199
Income taxes 423 9,512 9,556 18,630
------------ ----------- ----------- -----------
(6,881) 18,021 12,700 35,569
Distribution pertaining to guaranteed preferred beneficial interests in
the Corporation's convertible subordinated debentures, net of tax 132 132
------------ ----------- ----------- -----------
NET INCOME (LOSS) $ (7,013) $ 18,021 $ 12,568 $ 35,569
============ =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
BASIC $ (.21) $ .54 $ .38 $ 1.07
============ =========== =========== ===========
DILUTED $ (.21) $ .53 $ .37 $ 1.05
============ =========== =========== ===========
AVERAGE SHARES OUTSTANDING:
BASIC 33,460,399 33,195,885 33,506,656 33,300,994
============ =========== =========== ===========
DILUTED 34,112,906 33,829,628 34,025,063 33,931,002
============ =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
Page 2 of 27
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BEGINNING BALANCE $524,635 $484,860 $515,463 $495,673
Comprehensive income:
Net income (loss) (7,013) 18,021 12,568 35,569
Other comprehensive income (loss) 1,080 13,266 78 (1,103)
--------- --------- --------- ---------
Comprehensive income (loss) (5,933) 31,287 12,646 34,466
Cash dividends declared (4,699) (6,599) (12,378) (13,065)
Issuance of common stock for:
Dividend reinvestment plan 868 1,817
Stock options exercised 484 700 3,319 1,244
Exercise and conversion of stock purchase
contracts and debentures 238 381
Acquisitions 3,126
Employee incentive plans 1,530
Other 109 55 658 55
Adjustment to conform year-ends (745)
Purchase and retirement of common stock (11,656) (9,126) (21,424) (17,543)
--------- --------- --------- ---------
ENDING BALANCE $502,940 $502,283 $502,940 $502,283
========= ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
Page 3 of 27
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
1998 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 12,568 $ 35,569
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 16,655 8,881
Provision for loan losses 5,077 7,649
Amortization of premiums and discounts on securities 3,937 1,757
Net gains on securities (1,223) (742)
Loans originated for sale (397,161) (99,900)
Proceeds from sale of loans 388,039 107,297
Increase in interest receivable and other assets, net of amortization (14,343) (17,193)
Increase (decrease) in interest payable and other liabilities 15,722 (7,048)
------------ ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,271 36,270
------------ ----------
INVESTING ACTIVITIES:
Cash and cash equivalents of subsidiaries acquired, net of purchase price 876
Principal payments received on investment securities available for sale 397,299 110,863
Proceeds from the sale of investment securities available for sale 794,602 360,755
Purchase of investment securities available for sale (1,350,371) (556,936)
Proceeds from the maturity of investment securities held to maturity 21,748 4,977
Net decrease (increase) in loans 185,152 (171,604)
Purchase of premises and equipment (6,749) (7,721)
------------ ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 42,557 (259,666)
------------ ----------
FINANCING ACTIVITIES:
Net increase in deposits 76,348 4,962
Net increase (decrease) in short-term borrowings (66,840) 111,332
Payment and maturity of long-term debt (346,729) (84,033)
Proceeds from long-term borrowings 225,932 171,352
Proceeds pertaining to guaranteed preferred beneficial interests in
the Corporation's convertible subordinated debentures 172,500
Cash dividends paid (12,378) (13,065)
Proceeds from common stock issued for dividend reinvestment plan 1,817
Proceeds from exercise of stock options 3,319 1,244
Purchase and retirement of common stock (21,424) (17,543)
Contribution to fund ESOP 51
------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,728 176,117
------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 102,556 (47,279)
Adjustment to conform year-ends (745)
CASH AND CASH EQUIVALENTS AT JANUARY 1, 180,962 238,975
------------ ----------
CASH AND CASH EQUIVALENTS AT JUNE 30, $ 283,518 $ 190,951
============ ==========
Supplemental disclosure:
Cash paid for:
Interest $ 131,899 $ 128,357
Income taxes 17,568 16,592
Non-cash investing and financing activities:
Common stock issued for acquisitions 3,126
Stock issued in exchange of debentures and pursuant
to employee incentive plans 1,530 400
See notes to consolidated financial statements.
</TABLE>
Page 4 of 27
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 1997 Annual Report to Shareholders and in the Form 8-K dated June 3,
1998 which contains supplemental consolidated financial statements giving
retroactive effect to the completion of the merger of Pinnacle Financial
Services, Inc. (Pinnacle) with the Corporation.
NOTE 2: BUSINESS COMBINATIONS
On April 17, 1998, the Corporation issued 13,116,166 shares and assumed the
terms of stock options to allow the purchase of 123,901 shares of its common
stock in exchange for all of the outstanding shares of Pinnacle, headquartered
in St. Joseph, Michigan. 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 Pinnacle.
On January 1, 1998, the Corporation issued 109,800 shares of its 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 include the assets and
liabilities and results of operations from the January 1, 1998 transaction date
forward. Pro forma disclosure of the effects of this acquisition has not been
presented as the amounts involved in the transaction were not material to the
Corporation's financial results.
On August 3, 1998, the Corporation issued 1,088,942 shares and assumed the
terms of stock options to allow the purchase of 29,377 shares of its common
stock in exchange for all of the outstanding shares of National Bancorp
(National) of Tell City, Indiana. At June 30, 1998, National had total assets
and shareholders' equity of $194,043 and $18,687, respectively. The acquisition
will be accounted for under the pooling of interests method of accounting
without restatement of prior periods, as the amounts involved are not material
to the Corporation's financial results.
Page 5 of 27
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 June 30, 1998:
U.S. Treasury $ 16,197 $ 340 $ 16,537
Federal agencies:
Bonds and notes 303,960 766 $ (205) 304,521
Mortgage-backed securities 1,275,004 8,787 (944) 1,282,847
State and municipal 240,077 4,165 (1,098) 243,144
Collateralized mortgage obligations 79,376 763 (1,962) 78,177
Other securities 84,612 530 (23) 85,119
- ---------------------------------------------------------------------------------------
Total $1,999,226 $ 15,351 $ (4,232) $2,010,345
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held to Maturity at June 30, 1998:
Federal agencies:
Mortgage-backed securities $ 61,872 $ 113 $ (430) $ 61,555
State and municipal 136,618 5,980 (97) 142,501
Collateralized mortgage obligations 10,474 (45) 10,429
- --------------------------------------------------------------------------------------
Total $ 208,964 $ 6,093 $ (572) $214,485
======================================================================================
</TABLE>
The amortized cost and estimated market value of investment securities at
June 30, 1998, 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.
Page 6 of 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
NOTE 3: INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY,
CONTINUED
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Maturity distribution
at June 30, 1998:
Due in one year or less $ 8,269 $ 8,355 $ 875 $ 878
Due after one year through five years 23,523 23,969 24,406 25,145
Due after five years through ten years 283,693 285,137 59,885 62,471
Due after ten years 245,001 246,983 51,451 54,007
Mortgage-backed securities 1,275,004 1,282,847 61,873 61,556
Collateralized mortgage obligations 79,375 78,177 10,474 10,428
- -------------------------------------------------------------------------------------
Total debt securities 1,914,865 1,925,468 208,964 214,485
Equity securities 84,361 84,877
- -------------------------------------------------------------------------------------
Total $1,999,226 $2,010,345 $ 208,964 $214,485
=====================================================================================
</TABLE>
Proceeds from sales of investment securities available for sale during the
six months ended June 30, 1998 and 1997 were $794,602 and $360,755,
respectively. Gross gains and (losses) realized on those sales were $1,946 and
($723), respectively, for the six months ended June 30, 1998 and $1,520 and
($778) for the six months ended June 30, 1997, respectively.
NOTE 4: IMPAIRED LOANS
At June 30, 1998, impaired loans totaled $35,049. An allowance for loan
losses of $2,076 was recorded for impaired loans totaling $10,501. At December
31, 1997, impaired loans totaled $42,097. An allowance of $5,159 was recorded
for impaired loans totaling $26,035. The average balance for impaired loans was
$38,609 for the six months ended June 30, 1998.
NOTE 5: INTEREST RATE CONTRACTS
The Corporation has entered into interest rate contracts as a hedge against
the interest costs of certain deposits, repurchase agreements and long-term
borrowings to manage its interest rate sensitivity. Interest rate swaps (swaps)
represent an exchange of interest payments and the underlying principal balances
of the liabilities are not affected. At June 30, 1998, the Corporation had
swaps with a notional value of $440,000. The swaps require the Corporation to
pay a fixed rate of interest ranging from 5.32% to 5.60% and receive a variable
rate based on one-month or three-month LIBOR. The contracts terminate on or
prior to April 7, 2005. The Corporation realized $263 in net receipts from
swaps during the six months ended June 30, 1998. The carrying value and
estimated market value of all interest rate contracts at June 30, 1998, was $944
and $415, respectively.
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.
Page 7 of 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
NOTE 6: LONG-TERM DEBT
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
--------- ------------- ---------
<S> <C> <C> <C>
Parent Company:
Convertible subordinated debentures, 7.50%, redeemed
October 1997 $ 5,629
Notes payable, unsecured:
9.81%, paid in 1997 2,400
Variable rate adjusted with changes in LIBOR,
payable $250 quarterly through 2000 (6.16%,
6.47% and 6.29% at June 30, 1998, December 31,
1997, and June 30, 1997, respectively) $ 3,000 $ 3,500 4,000
Variable rate adjusted with changes in LIBOR, due
1999 (6.16%, 6.47% and 6.29% at June 30, 1998,
December 31, 1997, and June 30, 1997,
respectively) 35,000 15,000
Subsidiaries:
Federal Home Loan Bank advances, due at various dates
through 2016 (weighted average rates of 5.56%,
5.68% and 5.81% at June 30, 1998, December 31,
1997, and June 30, 1997, respectively) 594,842 677,979 597,000
Other, including capitalized leases 8,019 10,179 8,867
- -------------------------------------------------------------------------------------------
Total $ 605,861 $ 726,658 $ 632,896
===========================================================================================
</TABLE>
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.
NOTE 7: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
CONVERTIBLE SUBORDINATED DEBENTURES
In June 1998 the Corporation issued $172,500 of trust preferred securities
through CNB Capital Trust I, a Delaware statutory business trust created and
controlled by the Corporation. The trust preferred securities have a
liquidation amount of $25 per share with a cumulative annual distribution rate
of 6.0%, payable quarterly, and mature on June 30, 2028. The trust preferred
securities are convertible on or after August 22, 1998 at the initial conversion
ratio of .4605 shares of common stock of the Corporation for each trust
preferred security (equivalent to an initial conversion price of $54.29),
subject to certain adjustments.
The sole assets of CNB Capital Trust I are $177,835 of convertible
subordinated debentures of the Corporation with the interest rate, maturity date
and conversion rate substantially identical to those of the trust preferred
securities. The Corporation owns all of the common securities of CNB Capital
Trust I. The back-up obligations of the Corporation with respect to the trust
preferred securities constitute, in the aggregate, a full and
Page 8 of 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
CONVERTIBLE SUBORDINATED DEBENTURES, CONTINUED
unconditional guarantee by the Corporation of the obligations of CNB Capital
Trust I under the trust preferred securities.
The Corporation may redeem the convertible subordinated debentures and
thereby cause a redemption of the trust preferred securities in whole (or in
part from time to time) on or after June 23, 2001, or in whole (but not in part)
within 90 days following the occurrence and continuance of certain adverse
federal income tax or capital treatment events.
The Corporation records distributions payable on the trust preferred
securities similar to a minority interest distribution, net of tax, in its
Consolidated Statement of Income.
NOTE 8: NET INCOME PER SHARE
All share data included in the consolidated financial statements, notes and
Management's Discussion and Analysis has been adjusted for stock dividends.
The following table reconciles the numerators and denominators for basic
and diluted net income (loss) per share. Diluted net income per share was not
reported for the three months ended June 30, 1998 as the additional shares were
anti-dilutive.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
For basic net income (loss) per share - Net
income (loss) $(7,013) $18,021 $12,568 $35,569
Effect of dilutive securities:
6.00% trust preferred securities 132 132
7.50% convertible subordinated debentures 64 134
- -----------------------------------------------------------------------------------------
For diluted net income (loss) per share - Net
income (loss) after assumed conversions $(6,881) $18,085 $12,700 $35,703
=========================================================================================
DENOMINATOR (IN THOUSANDS):
For basic net income (loss) per share - Average
shares outstanding 33,460 33,196 33,507 33,301
Effect of dilutive securities:
6.00% trust preferred securities 266 133
7.50% convertible subordinated debentures 335 342
Stock options 387 299 385 288
- -----------------------------------------------------------------------------------------
For diluted net income (loss) per share - Average
shares outstanding after assumed conversions 34,113 33,830 34,025 33,931
=========================================================================================
</TABLE>
Page 9 of 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: COMPREHENSIVE INCOME
The Corporation adopted Financial Accounting Standards Board Statement No.
130, Reporting Comprehensive Income, effective January 1, 1998, which
established standards for the reporting and display of comprehensive income and
its components.
The Corporation's other comprehensive income (loss) included the following
components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net unrealized gains (losses) on available for sale
securities $1,431 $13,480 $ 805 $ (662)
Less: Adjustment for net securities gains realized in
net income (loss), net of tax 351 214 727 441
- -----------------------------------------------------------------------------------------------
Other comprehensive income (loss) $1,080 $13,266 $ 78 $(1,103)
===============================================================================================
</TABLE>
Page 10 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in thousands, except for share data)
OVERVIEW
- --------
The Corporation completed its merger with Pinnacle Financial Services
(Pinnacle) on April 17, 1998. In conjunction with that merger, which was
accounted for as a pooling of interests, the Corporation recorded merger and
other related charges of $30.2 million, net of tax, or $.89 per share. With
these charges, net income for the six months ended June 30, 1998, was $12,568 or
$.37 per diluted share compared to $35,569 or $1.05 per diluted share for the
six months ended June 30, 1997. The charges resulted in a net loss for 1998
second quarter of $7,013 or $.21 per share compared to net income of $19,581 or
$.58 per diluted share for first quarter 1998 and $18,021 or $.53 per diluted
share for the second quarter of 1997.
Excluding the merger and related charges, income was $23,201 or $.68 per
diluted share and the annualized returns on average assets and shareholder's
equity for the quarter ended June 30, 1998, were 1.42% and 17.87%, respectively,
compared to 1.20% and 15.30%, respectively, for the first quarter of 1998 and
1.12% and 14.50% for the second quarter of 1997, respectively.
The Corporation's average assets for the three months ended June 30, 1998,
was $6,546,113, which was $15,072 greater than the average of $6,531,041 for the
quarter ended March 31, 1998, and $91,458 greater than average assets for the
three month period ended June 30, 1997.
Cash dividends of $.23 per share were declared during the second quarter of
1998, representing an increase of 10% from the $.21 per share for the same
period of 1997. Total dividends declared for the first six months of 1998 and
1997 were $12,378 and $13,065, 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 $54,042 for the three months ended June 30, 1998, compared with
$58,056 for the same period in 1997. Net interest income was reduced $3,889 to
conform Pinnacle's accounting procedures for loan and investment security
premiums to that used by the Corporation. In addition, a prepayment penalty of
$123 was incurred to refinance certain Federal Home Loan Bank borrowings at
Pinnacle at more favorable terms. Primarily as a result of these charges, which
totaled $4,012, net interest income declined $3,073 from first quarter 1998 and
$4,014 from second quarter 1997. Net interest income for the six months ended
June 30, 1998, was reduced $3,187 from the same period of 1997 due primarily to
these charges.
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 3.70%, 3.85%, and 3.93%
respectively, for the three months ended June 30, March 31, 1998, and June 30,
1997. The charges discussed above reduced the net interest margin by 26 basis
points (b.p.). Consequently, the core net interest margin of 3.96% was improved
3 b.p. from second quarter 1997 and was 11 b.p. above first quarter 1998. Total
earning assets of $6,079,584 was $6,590 and $3,885 lower than first quarter 1998
and second quarter 1997, respectively. Earning assets for the six months ended
June 30, 1998, was $6,082,861 compared to $6,006,103 for the same period of
1997. Loans comprised 63% of average earning assets for the most recent quarter
compared to 65% for 1998 first quarter and 62% for 1997 second quarter.
Excluding the charges discussed above, the yield on total earning assets fell 1
b.p.
Page 11 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INTEREST INCOME, CONTINUED
- ------------------------------
from first quarter 1998 to 8.22%. The changes had no effect on total interest
expense to earning assets of 4.26% which was 12 b.p. lower than that for the
first quarter due primarily to lower rates paid on interest checking and base
savings products.
<TABLE>
<CAPTION>
NET INTEREST MARGIN
- ------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, MARCH 31, JUNE 30,
1998 1998 1997
<S> <C> <C> <C>
Yields (FTE)
Loans 8.72% 8.95% 9.11%
Securities 6.65 6.98 7.07
Other earning assets 5.85 4.83 6.67
--------- ---------- ---------
Total earning assets 7.96 8.23 8.33
Cost of funds
Interest bearing deposits 4.48 4.61 4.66
Other interest bearing liabilities 5.50 5.46 5.51
--------- ---------- ---------
Total interest bearing liabilities 4.74 4.83 4.88
--------- ---------- ---------
Total interest expense to earning assets 4.26 4.38 4.40
- ------------------------------------------------------------------------------
Net interest margin 3.70% 3.85% 3.93%
==============================================================================
</TABLE>
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 positive gap on June 30, 1998, of $389,859 which represented
6.4% of the $6,080,184 in earning assets at that date. Net interest income at
financial institutions with positive gaps tends to increase in periods of rising
interest rates and decrease as interest rates 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 1.0% or less should interest rates
increase or decrease by up to 200 basis points.
NON-INTEREST INCOME
- -------------------
Non-interest income for the six months ended June 30, 1998, was $49,054
which was increased $11,457 or 30.5% from the same period of 1997. Non-interest
income for the three months ended June 30, 1998, was $26,253 and increased
$3,452 from first quarter 1998 and $6,632 or 33.8% from second quarter 1997.
Non-interest income was reduced $252 due to the Pinnacle merger and the related
conversion of their loan and deposit systems to the Corporation's.
Page 12 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST INCOME, CONTINUED
- ------------------------------
<TABLE>
<CAPTION>
NON-INTEREST INCOME
- ------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, INCREASE
1998 1997 (DECREASE)
<S> <C> <C> <C>
Service charges on deposit accounts $11,764 $ 9,300 $ 2,464
Mortgage banking revenue 9,508 3,927 5,581
Trust and plan administration fees 5,399 4,549 850
Insurance premiums and commissions 6,113 5,107 1,006
Investment products fees 3,472 3,312 160
Non-interest fees on loans 2,753 3,193 (440)
Net securities gains 1,223 742 481
Other 8,822 7,467 1,355
- ------------------------------------------------------------------
Total non-interest income $49,054 $37,597 $11,457
==================================================================
</TABLE>
Service charges on deposit accounts increased $2,464 year-to-date 1998 or
26.5% from 1997 due to an increased number of deposit accounts, chargeable
services, higher activity fees and new fee sources. Service charges on deposit
accounts for the second quarter were $6,344 compared to $5,420 for first quarter
1998 and $4,866 for second quarter 1997. Mortgage banking revenue through June
30, 1998, was $9,508 and increased $5,581 or 142.1% from 1997 due to the strong
demand for new and refinanced residential mortgages and increased loan sales.
The Corporation has elected to sell the majority of its 1998 loan production in
addition to approximately $100 million of Pinnacle loans. Mortgage banking
revenue was $5,736 for the second quarter compared to $3,772 for the first
quarter and $2,047 for 1997 second quarter. Insurance premiums and commissions
increased $1,006 or 19.7% year-to-date from 1997 due to increased sales and
profit sharing bonuses received from insurance underwriters which are experience
related. Insurance premiums and commissions were $2,868 for the most recent
quarter compared to $2,546 one year ago and $3,245 for the first quarter. Trust
and plan administration fees of $5,399 were $850 or 18.7% higher than the first
six months of 1997 due to higher market value of assets under management and new
plans under administration. Investment products fees increased $160 primarily
due to the January 1, 1998, acquisition of Wedgewood Partners, Inc. (Wedgewood).
Non-interest fees on loans declined $440 from the six months ended June 30,
1997, primarily due to the May 30, 1997, sale of the credit card portfolio. Net
securities gains increased $481 to $1,223 and included $211 from covered call
options. Other income increased $1,355 for the six months ended June 30, 1998,
from the same period of 1997. Included were increases of $1,053 from bank-owned
life insurance and $596 from net securities trading account gains.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense, which includes personnel, occupancy costs, equipment
and other operating expenses was $132,878 for the six months ended June 30,
1998, compared to $90,093 for the same period of 1997, an increase of $42,785.
Expenses totaling $37,082 related to the merger and conversion of Pinnacle to
the Corporation's data processing systems were recorded during the second
quarter of 1998. Excluding these charges, non-interest expense for the six
months ended June 30, 1998, increased $5,703 or 6.3% from the same period of
1997. Operating expenses excluding the merger-related charges were $47,910 for
1998 second quarter, increased $24 from 1998 first quarter and $1,852 or 4.0%
from 1997 second quarter.
Page 13 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST EXPENSE, CONTINUED
- -------------------------------
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
- ------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, INCREASE
1998 1997 (DECREASE)
<S> <C> <C> <C>
Salaries and employee benefits $ 60,722 $47,909 $12,813
Data processing and other services 8,903 7,516 1,387
Occupancy 8,933 6,647 2,286
Equipment 11,809 5,541 6,268
Advertising and promotion 3,662 3,015 647
Professional fees 11,542 3,337 8,205
Postage and freight 2,701 2,384 317
Printing and supplies 2,793 2,455 338
Amortization of intangible assets 2,317 2,244 73
Other 19,496 9,045 10,451
- ------------------------------------------------------------------
Total non-interest expense $132,878 $90,093 $42,785
==================================================================
</TABLE>
Salaries and employee benefits, including $10,501 severance and benefit
accruals related to the Pinnacle merger, increased $12,813 year-to-date June 30,
1998, from the same period of 1997. The remaining increase generally related to
the January 1, 1998, Wedgewood acquisition, performance-based commissions and
awards and normal merit increases. Data processing and other services increased
$1,387 for the six-month period, including $1,548 related to the Pinnacle
conversion. Expenses to process credit card transactions for the six months
were $276 lower than the same period of 1997 due to the May 30, 1997, sale of
the credit card portfolio. Occupancy expense increased $2,286, principally due
to office closures and building write-downs totaling $1,781 during 1998 second
quarter. Equipment expense for the six months ended June 30, 1998, increased
$6,268 from the like period of 1997 and included $5,488 of write-offs at
Pinnacle related to equipment not needed after their conversion to the
Corporation's data processing systems. Advertising and promotion increased $647
due to increased marketing efforts related to various loan and deposit
promotions including $104 for new product brochures at Pinnacle. Professional
fees increased $8,205 for the six months ended June 30, 1998, principally due to
$8,153 in legal, accounting and investment banker fees in connection with the
Pinnacle merger. The Pinnacle merger accounted for $84 of the $317 increase in
postage and freight and all of the $338 increase in printing and supplies.
Other expenses increased $10,451 for the six months ended June 30, 1998, from
the same period of 1997, of which the Pinnacle merger and conversion accounted
for $9,018. Included in this charge were $5,063 to conform various accounting
practices at Pinnacle to that of the Corporation.
INCOME TAX EXPENSE
- ------------------
Income tax expense was $9,556 for the six months ended June 30, 1998,
compared with $18,630 for the same period in 1997. The effective tax rate was
42.9% and 34.4% for the six months ended June 30, 1998 and 1997, respectively.
The increased effective tax rate in 1998 was due to the non-deductibility of
various merger expenses during 1998. The effective tax rate in 1998 excluding
merger-related charges was 32.5%. The decline in the effective tax rate
excluding merger related charges is attributable to an increase in income from
tax exempt sources, including municipal investments and corporate owned-life
insurance.
Page 14 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000
- ---------
Most computer programs were originally designed to recognize calendar years
by only their last two digits. Consequently, these programs cannot
differentiate the year 2000 and beyond from the year 1900. This programming
issue will affect many data processing systems including those used by the
Corporation and its commercial customers. Management has formed a committee
which meets weekly to analyze the business and operational issues associated
with the year 2000 and to plan for and monitor the status of corrective
measures. The Corporation has outsourced most data processing activities and
those vendors are responsible for modifying their programs to be compliant with
year 2000 processing. The committee has found that where outside vendors are
not responsible, most programs and equipment are fully depreciated and no
write-off of cost will be necessary. Certifications from many of the vendors as
to their year 2000 compliance have been received and the remaining are expected
by the end of 1998. Work on this project is continuing and testing of critical
systems is scheduled to begin during the third quarter. Based on the foregoing,
the Corporation does not expect to spend any significant amounts with outside
contractors. Commercial customers are being contacted and efforts made to
ensure their readiness for year 2000. At this time, management does not
anticipate any material impact to the Corporation's operations, cash flows or
financial condition as a result of year 2000.
LOANS
- -----
Loans totaled $3,693,886 at June 30, 1998, compared to $3,987,447 at
December 31, 1997, and $3,853,365 at June 30, 1997. The loan portfolio
decreased $293,561 from year-end 1997 and $159,479 from one year ago. At June
30, 1998, the Corporation reclassified $96,462 of purchased SBA loans to held
for sale. These loans, previously included as commercial and industrial, were
purchased by Pinnacle with high premiums, have prepayment risk, do not meet
management's loan and investment strategies and are expected to be sold in the
third quarter. The Corporation continues to reduce its residential mortgage
loan portfolio by selling or securitizing most new production. This allows the
Corporation to increase overall loan yields and increase fee income by retaining
servicing. Residential mortgage loans, at June 30, 1998 decreased by $265,532
and $388,932 from December 31, 1997 and June 30, 1997, respectively.
<TABLE>
<CAPTION>
LOANS OUTSTANDING
- ------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
<S> <C> <C> <C>
Commercial, industrial and agricultural
production loans $1,241,728 $ 1,281,143 $1,141,694
Tax exempt loans 36,553 35,070 34,919
Real estate mortgage loans:
Commercial and agricultural 386,270 389,761 345,786
Construction 129,123 129,925 103,254
Residential 1,015,385 1,280,917 1,404,317
Consumer loans 884,827 870,631 823,395
- ------------------------------------------------------------------------------
Total loans $3,693,886 $ 3,987,447 $3,853,365
==============================================================================
</TABLE>
Page 15 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS, CONTINUED
- ----------------
Commercial loans totaled $1,241,728 at June 30, 1998, compared to
$1,281,143 at December 31, 1997 and $1,141,694 at June 30, 1997. The decline
from December was the result of the reclassification of the purchased SBA loans
to held for sale, as previously discussed. Excluding those loans, commercial
loans increased $57,047 and $196,496 from year-end and one year ago,
respectively. Commercial loans accounted for 33.6% of the loan portfolio at
June 30, 1998 compared to 29.6% at June 30, 1997.
Real estate mortgage loans, which consist of residential, commercial and
agricultural loans secured by real estate and construction loans, totaled
$1,530,778 at June 30, 1998, compared to $1,853,357 one year prior. Residential
mortgage loans decreased $265,532 from year-end 1997 and $388,932 from one year
ago. Residential mortgage loans were 27.5% of total loans at June 30, 1998,
compared to 36.4% one year prior. Demand for new residential mortgage loans
remained strong throughout 1997 and thus far in 1998. Consistent with
management's plan to reduce the concentration in the residential mortgage loan
portfolio to approximately 25% of total loans, the Corporation sold a
significant portion of that production. The Corporation originated $161 million
of residential mortgage loans in the second quarter of 1998, most of which were
sold or securitized. The Corporation generally continues to service these
loans. At June 30, 1998, $1,195,050 of residential mortgage loans originated by
the Corporation's subsidiary banks and subsequently sold in the secondary market
were being serviced. The Corporation had capitalized servicing rights of $6,013
relating to $620,214 of those loans.
Consumer loans, which include installment, home equity and other lines of
credit, increased $14,196 from December 31, 1997, and $61,432 from one year ago.
Indirect installment loan balances acquired through various automobile
dealerships increased $23,016 from year-end and $58,157 from one year ago to
$274,496 at June 30, 1998. At June 30, 1998, all other installment loans had
decreased $9,426 from December 31 and $5,715 from June 30, 1997 to $439,382.
Home equity and other lines of credit outstandings totaled $170,949 at June 30,
1998, an increase of $8,990 from one year ago, or 5.6%.
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.
Page 16 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ASSET QUALITY, CONTINUED
- ------------------------
<TABLE>
<CAPTION>
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
1998 1997
<S> <C> <C>
Beginning balance $ 55,223 $ 46,171
Adjustment to conform year-ends 501
Provision for loan losses 5,077 7,649
Loans charged-off (9,067) (8,614)
Recoveries 2,505 1,368
- --------------------------------------------------------
Ending balance $ 53,738 $ 47,075
========================================================
Percent to total loans 1.45% 1.22%
========================================================
</TABLE>
The allowance for loan losses was $53,738 at June 30, 1998, representing
1.45% of total loans, compared with $55,223 at December 31, 1997, or 1.38% of
loans. At June 30, 1997, the allowance for loan losses was $47,075 and
represented 1.22% of total loans. Annualized net charge-offs to average loans
was .34% during the six months ended June 30, 1998, compared to .39% for the
same period of 1997. The provision for loan losses to average loans was .26%
and .41% for the six months ended June 30, 1998 and 1997, respectively. The
provision for loan losses was less than net charge-offs due to management
considering the ratios of allowance to loans and to non-performing loans
adequate. The allowance for loan losses to non-performing loans was 194% at
June 30, 1998, compared to 197% at December 31, 1997, and 166% at June 30,
1997.
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 June 30, 1998, totaled
$27,637, a decrease of $337 from December 31, 1997. The non-performing loans to
total loans ratio was .75% on June 30, 1998, as compared to .70% on December 31,
1997, and .73% on June 30, 1997. Total risk assets equaled 1.16% of loan-
related assets at June 30, 1998, compared to 1.11% at December 31, 1997. In
addition to loans classified as risk assets, there were other loans totaling
$18,804 at June 30, 1998, 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.
Page 17 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ASSET QUALITY, CONTINUED
- ------------------------
<TABLE>
<CAPTION>
NON-PERFORMING AND RISK ASSETS
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
<S> <C> <C> <C>
Non-accrual loans:
Commercial, agricultural and tax exempt $ 13,351 $ 12,801 $ 16,147
Real estate mortgage 11,939 12,115 8,967
Consumer 2,024 1,657 1,549
---------- -------------- ----------
Total non-accrual 27,314 26,573 26,663
Restructured loans 323 1,401 1,613
---------- -------------- ----------
Total non-performing loans 27,637 27,974 28,276
Foreclosed properties 8,186 6,703 4,772
---------- -------------- ----------
Total non-performing assets 35,823 34,677 33,048
90 days or more past due:
Commercial, agricultural and tax exempt 2,843 2,372 4,264
Real estate mortgage 2,811 5,427 4,072
Consumer 1,497 1,683 1,759
---------- -------------- ----------
Total 90 days or more past due 7,151 9,482 10,095
---------- -------------- ----------
Total risk assets $ 42,974 $ 44,159 $ 43,143
================================================================================
Risk assets to loan-related assets 1.16% 1.11% 1.12%
================================================================================
</TABLE>
INVESTMENT SECURITIES
- ---------------------
Total investment securities available for sale and held to maturity
represented 37% of earning assets at June 30, 1998, compared to 34% and 37% at
December 31, 1997, and June 30, 1997, 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 3.9 years and 4.5 years, respectively, at June 30, 1998.
Additional state and municipal securities have also been purchased due to their
higher tax equivalent yields.
Page 18 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DEPOSITS AND OTHER SOURCES OF FUNDS
- -----------------------------------
Total deposits were $4,691,805 at June 30, 1998, compared to $4,615,062 and
$4,598,695 at December 31, 1997, and June 30, 1997, respectively. Since
December 31, 1997, non-interest bearing deposits increased by $122,183 and
interest bearing deposits decreased by $45,440. Since changes in total deposits
or deposit categories as of a balance sheet date are not necessarily indicative
of an overall trend, changes in average balances can provide a more accurate
reflection. Average non-interest bearing deposits increased $55,367 and
interest bearing deposits increased $22,898 for the six months ended June 30,
1998 over the same period of 1997. Money market deposit accounts increased
$95,436 from year-end to $676,281 while savings accounts declined $28,849 to
$472,671. Interest checking accounts declined $31,172 to $524,738. Non-interest
bearing deposits increased from June 30, 1997, by $132,018 and interest bearing
deposits decreased by $38,908.
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. At June 30, 1998, the proceeds from the issuance of the
trust preferred securities, discussed in Note 7 to the financial statements,
were used to reduce funding through repurchase agreements and advances from the
Federal Home Loan Bank (FHLB). However, management anticipates these sources of
funds to increase as loans and other earning assets are increased. Repurchase
agreements were $501,708, $586,855 and $663,121 at June 30, 1998, December 31,
1997, and June 30, 1997, respectively. A portion of these repurchase
agreements, acquired to fund certain fixed rate earning assets, is being hedged
by interest rate swaps.
Long-term debt totaled $605,861 at June 30, 1998, compared to $726,658 at
December 31, 1997, and $632,896 at June 30, 1997. Advances from the FHLB
accounted for $594,842 of total long-term debt at June 30, 1998.
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 June 30,
1998, the Corporation had $280,131 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 $50,000
bank line of credit. At June 30, 1998, the entire $50,000 of the line of credit
remained available for future use.
Page 19 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
- ------------------------------------------
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 June 30, 1998, was $502,940, compared
to $515,463 at December 31, 1997 and $502,283 at June 30, 1997. 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,
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 to average assets (as
defined). Management believes, that as of June 30, 1998, the Corporation and
its banking subsidiaries exceeded all regulatory capital adequacy requirements
to which they were subject.
As of June 30, 1998, 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 trust preferred securities, discussed in Note 7 to the
financial statements, qualify as regulatory capital and are included as such in
the following table which shows the Corporation's actual and minimum required
capital amounts and ratios as mandated by the respective principal federal
regulatory authority at June 30, 1998:
<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 $674,797 16.57% $325,700 8.00% $407,125 10.00%
Tier 1 Capital to risk weighted assets 601,874 14.78 162,850 4.00 244,275 6.00
Tier 1 Capital to average assets
(leverage ratio) 451,406 6.94 260,028 4.00 325,034 5.00
</TABLE>
Page 20 of 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD LOOKING STATEMENTS
- --------------------------
Certain of the statements contained in this Report that are not historical
facts, including, without limitation, statements of future expectations,
projections of results of operations and financial condition, statements of
future economic performance and other forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, are subject to
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Corporation to differ
materially from those contemplated in such forward-looking statements. The
words "intend," "expect," "project," "estimate," "predict," "anticipate,"
"should," "believe" and similar expressions also are intended to identify
forward-looking statements. Important factors which may cause actual results to
differ from those contemplated in such forward-looking statements include, but
are not limited to: (i) the results of the Corporation's efforts to implement
its business strategy, (ii) expected cost savings that may be associated with
future and recently completed or announced acquisitions, including Pinnacle and
National, cannot be fully realized and/or revenues following such acquisitions
are lower than expected and/or expenses following such acquisitions are higher
than expected, (iii) greater than expected deposit attrition or customer loss
following the acquisition of Pinnacle and National, (iv) costs or difficulties
related to the integration of the businesses of the Corporation and Pinnacle and
National are greater than expected, (v) changes in the interest rate environment
reduce margins, (vi) legislation or regulatory requirements or changes adversely
affecting the businesses in which the Corporation is engaged, (vii) adverse
changes in business conditions and inflation, (viii) general economic
conditions, either nationally or regionally, which are less favorable than
expected and that result in, among other things, a deterioration in credit
quality, (ix) competitive pressures among financial institutions increase
significantly, (x) changes in the securities markets, (xi) actions of the
Corporation's competitors and the Corporation's ability to respond to such
actions, (xii) the cost of the Corporation's capital, which may depend in part
on the Corporation's portfolio quality, ratings, prospects and outlook, (xiii)
changes in governmental regulation, tax rates and similar matters, (xiv) "year
2000" computer and data processing issues, and (xv) other risks detailed in the
Corporation's other filings with the Securities and Exchange Commission. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. All subsequent written and oral forward-looking statements
attributable to the Corporation or persons acting on its behalf are expressly
qualified in their entirety by the foregoing factors. Undue reliance should not
be placed on such statements, which speak only as of the date hereof. The
Corporation undertakes no obligation to release publicly any revisions to these
forward-looking statements after the date hereof to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk exposures that affect
the "Quantitative and Qualitative Disclosures" presented in the Corporation's
annual report on Form 10-K for the year ended December 31, 1997.
Page 21 of 27
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
The Securities and Exchange Commission recently adopted certain amendments
to its rules governing the submission by shareholders of proposals intended to
be presented at meetings of shareholders. These amendments, which became
effective on June 29, 1998, included provisions granting companies the right to
exercise discretionary voting authority with respect to certain shareholder
proposals that the company did not have notice of within a specified time period
prior to a meeting of its shareholders.
As disclosed in the Corporation's 1998 Proxy Statement, shareholder
proposals for the Annual Meeting of Shareholders to be held in April 1999 must
be received by the Corporation not later than November 26, 1998, in order to be
considered for inclusion in the 1999 Proxy Statement and must meet the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934 (the
"Exchange Act"). Pursuant to the recent amendments governing the submission of
shareholder proposals, shareholders of the Corporation are hereby notified that
any shareholder proposal not included in the Corporation's Proxy Statement for
its 1999 Annual Meeting will be considered untimely for purposes of Rules 14a-4
and 14a-5 under the Exchange Act if notice of the proposal is not received by
the Corporation on or before February 5, 1999. Management proxies will be
authorized to exercise discretionary voting authority with respect to any
shareholder proposal not included in the Corporation's Proxy Statement for its
1999 Annual Meeting unless (a) the Corporation receives notice of such proposal
on or before February 5, 1999, and (b) the conditions set forth in Rule
14a-4(c)(2)(i)-(iii) under the Exchange Act are satisfied.
Page 22 of 27
PART II. OTHER INFORMATION (CONTINUED)
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/A dated June 2, 1998, amending a report
on Form 8-K dated May 1, 1998, was filed regarding the
consummation of the Pinnacle Financial Services, Inc. merger.
A report on Form 8-K dated June 3, 1998, as amended by Form
8-K/A dated June 16, 1998, was filed regarding the restated
supplemental consolidated financial statements of the
Corporation giving retroactive effect to the completion 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 23 of 27
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 August 13, 1998 by /s/ James J. Giancola
------------------- -------------------------------------------
James J. Giancola,
President and Chief Executive Officer
Date August 13, 1998 by /s/ Ralph L. Alley
------------------- ------------------------------------------
Ralph L. Alley, Senior Vice President,
Controller and Treasurer
(Principal Accounting Officer)
Page 24 of 27
EXHIBIT INDEX
Reg. S-K
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
27 Financial Data Schedule 26-27
Page 25 of 27
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This schedule contains summary financial information extracted from CNB
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