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
SEPTEMBER 30, 1998
CNB BANCSHARES, INC. 0-11510
(Exact name of registrant as specified in its charter) (Commission file number)
INDIANA 35-1568731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20 N.W. THIRD STREET, EVANSVILLE, INDIANA 47739
(Address of principal executive office) (Zip Code)
(812) 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 October 31, 1998, there were 35,769,244 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 11-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II. Other Information 23
Signatures 24
Exhibit Index 25
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CNB BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except for share data)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
- -------
Cash and due from banks $ 164,531 $ 160,189 $ 89,861
Federal funds sold and other short-term
money market investments 8,269 20,773 9,622
-------------- ------------- --------------
TOTAL CASH AND CASH EQUIVALENTS 172,800 180,962 99,483
Loans held for sale 159,967 50,823 27,497
Investment securities available for sale 2,186,065 1,854,025 1,950,286
Investment securities held to maturity
(Market value $207,382 at September 30, 1998,
$236,242 at December 31, 1997, and $241,538
at September 30, 1997) 198,554 230,903 237,387
Loans, net of unearned income 3,823,764 3,987,447 3,958,958
Less: Allowance for loan losses 55,878 55,223 58,524
-------------- ------------- --------------
NET LOANS 3,767,886 3,932,224 3,900,434
Premises and equipment 99,636 104,420 102,551
Intangible assets 51,330 48,620 49,309
Interest receivable 48,393 46,078 46,988
Other assets 159,890 148,081 177,815
-------------- ------------- --------------
TOTAL ASSETS $ 6,844,521 $ 6,596,136 $ 6,591,750
============== ============= ==============
LIABILITIES
- -----------
Deposits:
Non-interest bearing $ 480,813 $ 468,438 $ 438,707
Interest bearing 4,349,169 4,146,624 4,083,993
-------------- ------------- --------------
TOTAL DEPOSITS 4,829,982 4,615,062 4,522,700
Securities sold under repurchase agreements 523,318 586,855 711,160
Federal funds purchased and other short-term
borrowings 82,480 94,220 108,523
FHLB advances and other long-term debt 638,573 726,658 690,473
Interest payable and other liabilities 60,334 57,878 59,343
-------------- ------------- --------------
TOTAL LIABILITIES 6,134,687 6,080,673 6,092,199
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: 35,923,217 at September 30, 1998,
33,484,443 at December 31, 1997, and 33,254,089
at September 30, 1997 35,923 33,484 33,254
Capital surplus 417,028 364,987 361,220
Retained earnings 67,497 110,343 99,377
Accumulated other comprehensive income - net
unrealized gains on investment securities available
for sale 16,886 6,649 5,700
-------------- ------------- --------------
TOTAL SHAREHOLDERS' EQUITY 537,334 515,463 499,551
-------------- ------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 6,844,521 $ 6,596,136 $ 6,591,750
============== ============= ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE> 1 of 27
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except for share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees:
Taxable $ 86,324 $ 88,536 $ 256,895 $ 255,543
Tax exempt 572 567 1,666 1,700
Loans held for sale 2,886 432 4,661 724
Investment securities:
Taxable 31,287 33,848 91,124 103,065
Tax exempt 5,096 3,203 13,214 9,191
Federal funds sold and other short-term
money market investments 463 325 745 1,084
-------------- ------------- ----------- -----------
Total interest income 126,628 126,911 368,305 371,307
INTEREST EXPENSE
Deposits 47,469 48,270 141,128 142,973
Short-term borrowings 7,794 10,033 26,069 27,931
FHLB advances and other long-term debt 8,569 10,290 27,155 27,741
-------------- ------------- ----------- -----------
Total interest expense 63,832 68,593 194,352 198,645
-------------- ------------- ----------- -----------
NET INTEREST INCOME 62,796 58,318 173,953 172,662
Provision for loan losses 1,844 13,425 6,921 21,074
-------------- ------------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION 60,952 44,893 167,032 151,588
FOR LOAN LOSSES
NON-INTEREST INCOME
Service charges on deposit accounts 7,077 5,281 18,841 14,581
Mortgage banking revenue 5,211 2,740 14,142 6,245
Insurance premiums and commissions 3,118 2,328 9,231 7,435
Trust and plan administration fees 2,953 2,351 8,352 6,900
Non-interest fees on loans 2,150 2,025 5,659 5,640
Investment products fees 1,804 1,896 5,276 5,208
Net securities gains 480 648 1,703 1,390
Other 5,106 4,695 13,749 12,162
-------------- ------------- ----------- -----------
Total non-interest income 27,899 21,964 76,953 59,561
-------------- ------------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 25,873 29,227 86,595 77,136
Data processing and other services 3,846 6,146 12,749 13,662
Occupancy 3,672 3,364 12,605 10,011
Equipment 2,801 2,627 14,236 7,820
Professional fees 1,814 3,592 13,356 6,929
Advertising and promotion 1,804 1,710 5,466 4,725
Printing and supplies 1,512 1,242 4,305 3,697
Telephone and data communication 1,490 1,095 3,811 3,061
Postage and freight 1,247 1,217 3,948 3,601
Amortization of intangible assets 1,192 1,118 3,509 3,362
Other 4,984 6,238 22,533 13,665
-------------- ------------- ----------- -----------
Total non-interest expense 50,235 57,576 183,113 147,669
-------------- ------------- ----------- -----------
INCOME BEFORE INCOME TAXES 38,616 9,281 60,872 63,480
Income taxes 12,773 3,613 22,329 22,243
-------------- ------------- ----------- -----------
25,843 5,668 38,543 41,237
Distribution pertaining to guaranteed preferred
beneficial interests in the Corporation's
convertible subordinated debentures,
net of tax 1,563 1,695
-------------- ------------- ----------- -----------
NET INCOME $ 24,280 $ 5,668 $ 36,848 $ 41,237
============== ============= =========== ===========
NET INCOME PER SHARE:
BASIC $ .68 $ .16 $ 1.04 $ 1.18
============== ============= =========== ===========
DILUTED $ .66 $ .16 $ 1.04 $ 1.16
============== ============= =========== ===========
AVERAGE SHARES OUTSTANDING:
BASIC 35,658,108 34,795,824 35,342,439 34,908,680
============== ============= =========== ===========
DILUTED 39,382,280 35,435,509 36,961,789 35,551,258
============== ============= =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 2 of 27
CNB BANCSHARES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BEGINNING BALANCE $ 502,940 $ 502,283 $ 515,463 $ 495,673
Comprehensive income:
Net income 24,280 5,668 36,848 41,237
Other comprehensive income 10,159 8,011 10,237 6,908
------------ ------------- ------------ ------------
Comprehensive income 34,439 13,679 47,085 48,145
Cash dividends declared (7,774) (8,185) (20,152) (21,250)
Issuance of common stock for:
Dividend reinvestment plan 1,817
Stock options exercised 412 1,283 3,731 2,527
Exercise and conversion of stock purchase
contracts and debentures 4,234 4,615
Acquisitions 18,050 21,176
Employee incentive plans 1,530
Other 328 710 383
Adjustment to conform year-ends (745)
Purchase and retirement of common stock (10,733) (14,071) (32,209) (31,614)
------------- ------------- ------------ ------------
ENDING BALANCE $ 537,334 $ 499,551 $ 537,334 $ 499,551
============= ============= ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE> 3 of 27
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 36,848 $ 41,237
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 22,227 13,416
Provision for loan losses 6,921 21,074
Amortization of premiums and discounts on securities 5,504 2,542
Net gains on securities (1,703) (1,390)
Loans originated for sale (554,177) (201,061)
Proceeds from sale of loans 542,295 191,506
Increase in interest receivable and other assets, net of amortization (15,467) (82,944)
Increase in interest payable and other liabilities 1,812 4,512
------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 44,260 (11,108)
------------- ------------
INVESTING ACTIVITIES:
Cash and cash equivalents of subsidiaries acquired, net of purchase price 9,512
Principal payments received on investment securities available for sale 657,566 272,768
Proceeds from the sale of investment securities available for sale 1,028,214 736,987
Purchase of investment securities available for sale (1,971,722) (1,041,754)
Proceeds from the maturity of investment securities held to maturity 32,070 10,363
Net decrease (increase) in loans 196,368 (280,189)
Purchase of premises and equipment (8,292) (12,579)
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (56,284) (314,404)
------------- ------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 56,366 (71,261)
Net increase (decrease) in short-term borrowings (79,826) 156,827
Payment and maturity of long-term debt (375,592) (137,607)
Proceeds from long-term borrowings 279,044 286,947
Proceeds pertaining to guaranteed preferred beneficial interests in
the Corporation's convertible subordinated debentures 172,500
Cash dividends paid (20,152) (21,250)
Proceeds from common stock issued for dividend reinvestment plan 1,817
Proceeds from exercise of stock options 3,731 2,527
Purchase and retirement of common stock (32,209) (31,614)
Other 379
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,862 186,765
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,162) (138,747)
Adjustment to conform year-ends (745)
CASH AND CASH EQUIVALENTS AT JANUARY 1, 180,962 238,975
------------- ------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, $ 172,800 $ 99,483
============= ============
Supplemental disclosure:
Cash paid for:
Interest $ 192,781 $ 192,280
Income taxes 24,320 23,273
Non-cash investing and financing activities:
Common stock issued for acquisitions 21,176
Stock issued in exchange of debentures and pursuant
to employee incentive plans 1,530 4,844
See notes to consolidated financial statements.
<PAGE> 4 of 27
CNB BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except for share data)
</TABLE>
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 August 3, 1998, the Corporation issued 1,143,389 shares and assumed the
terms of stock options that allow the purchase of 30,846 shares of its common
stock in exchange for all of the outstanding shares of National Bancorp
(National) of Tell City, Indiana. The acquisition was accounted for under the
pooling of interests method of accounting without restatement of prior periods,
as the amounts involved were not material to the Corporation's financial
results.
On April 17, 1998, the Corporation issued 13,771,974 shares and assumed the
terms of stock options that allow the purchase of 130,096 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 115,290 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.
<PAGE> 5 of 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3: 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 September 30, 1998:
<S> <C> <C> <C> <C>
U.S. Treasury $ 19,198 $ 979 $ 20,177
Federal agencies:
Bonds and notes 247,549 1,024 248,573
Mortgage-backed securities 1,460,212 17,116 $ (77) 1,477,251
State and municipal 279,986 10,339 (71) 290,254
Collateralized mortgage obligations 54,687 579 (2,103) 53,163
Other securities 96,521 400 (274) 96,647
- --------------------------------------------------------------------------------------------
Total $2,158,153 $ 30,437 $ (2,525) $2,186,065
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held to Maturity at September 30, 1998:
Federal agencies:
Mortgage-backed securities $ 58,446 $ 516 $ (46) $ 58,916
State and municipal 136,281 8,405 (21) 144,665
Collateralized mortgage obligations 3,827 (26) 3,801
- -----------------------------------------------------------------------------------------
Total $ 198,554 $ 8,921 $ (93) $207,382
=========================================================================================
</TABLE>
The amortized cost and estimated market value of investment securities at
September 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)
NOTE 3: INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY,
CONTINUED
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Maturity distribution
At September 30, 1998:
Due in one year or less $ 12,546 $ 12,694 $ 902 $ 905
Due after one year through five years 25,587 26,263 25,841 26,761
Due after five years through ten years 266,830 269,941 69,643 74,376
Due after ten years 242,918 251,266 39,895 42,623
Mortgage-backed securities 1,460,212 1,477,251 58,446 58,916
Collateralized mortgage obligations 54,686 53,163 3,827 3,801
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 2,062,779 2,090,578 198,554 207,382
Equity securities 95,374 95,487
- -----------------------------------------------------------------------------------------------------------------
Total $ 2,158,153 $ 2,186,065 $ 198,554 $ 207,382
=================================================================================================================
</TABLE>
Proceeds from sales of investment securities available for sale during the
nine months ended September 30, 1998 and 1997 were $1,028,214 and $736,987,
respectively. Gross gains and (losses) realized on those sales were $2,768 and
($1,065), respectively, for the nine months ended September 30, 1998 and $2,579
and ($1,189) for the nine months ended September 30, 1997, respectively.
NOTE 4: IMPAIRED LOANS
At September 30, 1998, impaired loans totaled $34,663. An allowance for
loan losses of $2,849 was recorded for impaired loans totaling $12,231. 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 $37,930 for the nine months ended September 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 September 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 $534 in net receipts from
swaps during the nine months ended September 30, 1998. The carrying value and
estimated market value of all interest rate contracts at September 30, 1998,
were $619 and ($14,908), 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)
NOTE 6: LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Parent Company:
Convertible subordinated debentures, 7.50%, redeemed
October 1997 $ 1,185
Notes payable, unsecured:
9.81%, paid in 1997 2,400
Variable rate adjusted with changes in LIBOR, payable
$250 quarterly through 2000 (6.13%, 6.47% and 6.16%
at September 30, 1998, December 31, 1997, and
September 30, 1997, respectively) $ 2,750 $ 3,500 3,750
Variable rate adjusted with changes in LIBOR, due
1999 (6.13%, 6.47% and 6.16% at September 30, 1998,
December 31, 1997, and September 30, 1997,
respectively) 35,000 26,000
Subsidiaries:
Federal Home Loan Bank advances, due at various dates
through 2018 (weighted average rates of 5.51%, 5.68%
and 5.84% at September 30, 1998, December 31, 1997,
and September 30, 1997, respectively) 626,045 677,979 647,212
Other, including capitalized leases 9,778 10,179 9,926
- ------------------------------------------------------------------------------------------------------
Total $ 638,573 $ 726,658 $ 690,473
======================================================================================================
</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 at the conversion ratio of .4835 shares of common
stock of the Corporation for each trust preferred security (equivalent to a
conversion price of $51.71), 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
<PAGE> 8 of 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
CONVERTIBLE SUBORDINATED DEBENTURES, CONTINUED
and 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,
including the one-for-twenty stock dividend paid on September 18, 1998.
The following table reconciles the numerators and denominators for basic and
diluted net income per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
For basic net income per share - Net income $ 24,280 $ 5,668 $ 36,848 $ 41,237
Effect of dilutive securities:
6.00% trust preferred securities 1,563 1,695
7.50% convertible subordinated debentures 49 183
- -----------------------------------------------------------------------------------------------------
For diluted net income per share - Net income
after assumed conversions $ 25,843 $ 5,717 $ 38,543 $ 41,420
=====================================================================================================
DENOMINATOR (IN THOUSANDS):
For basic net income per share - Average shares
outstanding 35,658 34,796 35,342 34,909
Effect of dilutive securities:
6.00% trust preferred securities 3,336 1,218
7.50% convertible subordinated debentures 310 331
Stock options 388 330 402 311
- -----------------------------------------------------------------------------------------------------
For diluted net income per share - Average
shares outstanding after assumed conversions 39,382 35,436 36,962 35,551
=====================================================================================================
</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 included the following
components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net realized and unrealized gains on available for
sale securities $ 10,444 $ 8,396 $ 11,250 $ 7,735
Less: Adjustment for net securities gains realized
in net income, net of tax 285 385 1,013 827
- --------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 10,159 $ 8,011 $ 10,237 $ 6,908
==============================================================================================================
</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
- ---------
Net income for the three months ended September 30, 1998, was $24,280
compared to $5,668 earned in the same period of 1997, when merger-related
charges of $13,994, net of tax, were incurred in connection with mergers
consummated by Pinnacle. Diluted earnings per share for third quarter 1998,
adjusted for the 5% stock dividend paid September 18, 1998, was $.66 compared to
$.16 per share in third quarter 1997, or $.56, excluding the merger-related
charges. 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 in second quarter 1998 of $30.2 million, net of tax, or
$.82 per share on a year-to-date basis. With these charges, net income for the
nine months ended September 30, 1998, was $36,848 or $1.04 per diluted share
compared to $41,237 or $1.16 per diluted share for the nine months ended
September 30, 1997. Excluding the 1998 and 1997 merger and related charges,
income for nine months ended September 30, 1998 was $67,062, or $1.86 per
diluted share, compared to $55,231, or $1.56 per share for the same period of
1997.
The annualized returns on average assets and shareholders' equity for the
quarter ended September 30, 1998, were 1.45% and 19.10%, respectively, compared
to 1.20% and 15.73%, respectively, for the third quarter of 1997, excluding the
merger-related charges previously discussed.
The Corporation's average assets for the three months ended September 30,
1998, were $6,683,155, which was $137,042 greater than the average of $6,546,113
for the quarter ended June 30, 1998, and $140,851 greater than average assets
for the three month period ended September 30, 1997.
Cash dividends, adjusted for the 5% stock dividend, of $.22 per share were
declared during the third quarter of 1998, representing an increase of 10% from
the $.20 per share for the same period of 1997. Total dividends declared for
the nine months of 1998 and 1997 were $20,152 and $21,250, respectively.
Additionally, cash dividends of $.24 per share were declared on October 1, 1998.
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 $62,796 for the three months ended September 30, 1998, compared with
$58,318 for the same period in 1997. The increase was primarily due to the June
23, 1998 issuance of the trust preferred securities, discussed in Note 7 to the
financial statements, and an improved net interest margin. On a year-to-date
basis net interest income, including accounting conformity adjustments of $4,012
recorded in association with the second quarter 1998 merger with Pinnacle,
increased only $1,291 to $173,953. Excluding those adjustments, net interest
income increased $5,303, or 3.1%.
The net interest margin is a percentage computed by dividing net interest
income on a fully taxable equivalent basis (FTE) by average earning assets and
represents a measure of basic earnings on interest bearing assets held by the
Corporation. The annualized net interest margins were 4.19%, 3.70%, and 3.92%
respectively, for the three months ended September 30, 1998, June 30, 1998, and
September 30, 1997. The adjustments discussed above reduced the net interest
margin by 26 basis points (b.p.) in the second quarter. Consequently, the core
net interest margin improved 23 b.p. from second quarter 1998 and was 27 b.p.
above third quarter 1997. The issuance of the trust preferred securities
resulted in average earning assets increasing approximately $127,500 and
accounted for approximately 17 b.p. of the increase. Average earning assets of
$6,224,039 was $144,455 and $71,513 higher than second quarter 1998 and third
quarter 1997, respectively. Average earning assets for the nine
<PAGE> 11 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INTEREST INCOME, CONTINUED
- ------------------------------
months ended September 30, 1998, were $6,130,438 compared to $6,055,447 for the
same period of 1997. Loans comprised 61% of average earning assets for the most
recent quarter compared to 63% for 1998 second quarter and 64% for 1997 third
quarter. The yield on earning assets increased 3 b.p. from second quarter
1998's 8.22%, excluding the adjustments previously discussed. Interest expense
to earning assets was 4.06% for the quarter, a decrease of 20 b.p. from second
quarter 1998, principally due to the funding provided by the trust preferred
securities, and a slightly lower cost of interest bearing deposits.
NET INTEREST MARGIN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1998 1998 1997
<S> <C> <C> <C>
Yields (FTE)
Loans 9.09% 8.72% 9.10%
Securities 6.87 6.65 7.05
Other earning assets 7.92 5.85 7.19
---- ---- ----
Total earning assets 8.25 7.96 8.36
Cost of funds
Interest bearing deposits 4.45 4.48 4.69
Other interest bearing liabilities 5.46 5.50 5.53
---- ---- ----
Total interest bearing liabilities 4.67 4.74 4.92
---- ---- ----
Total interest expense to earning assets 4.06 4.26 4.44
- ---------------------------------------------------------------------------------------------
Net interest margin 4.19% 3.70% 3.92%
=============================================================================================
</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 September 30, 1998, of $283,468 which
represented 4.4% of the $6,376,619 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 2.0% or
less should interest rates increase or decrease by up to 200 basis points over a
twelve-month period.
NON-INTEREST INCOME
- -------------------
Non-interest income for the nine months ended September 30, 1998, was
$76,953 which increased $17,392 or 29.2% from the same period of 1997.
Non-interest income for the three months ended September 30, 1998, was $27,899
and increased $1,646 from second quarter 1998 and $5,935 or 27.0% from third
quarter 1997.
<PAGE> 12 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST INCOME, CONTINUED
- ------------------------------
NON-INTEREST INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997 INCREASE
<S> <C> <C> <C>
Service charges on deposit accounts $ 18,841 $ 14,581 $ 4,260
Mortgage banking revenue 14,142 6,245 7,897
Insurance premiums and commissions 9,231 7,435 1,796
Trust and plan administration fees 8,352 6,900 1,452
Non-interest fees on loans 5,659 5,640 19
Investment products fees 5,276 5,208 68
Net securities gains 1,703 1,390 313
Other 13,749 12,162 1,587
- -------------------------------------------------------------------------------
Total non-interest income $ 76,953 $ 59,561 $ 17,392
===============================================================================
</TABLE>
Service charges on deposit accounts increased $4,260 year-to-date 1998 or
29.2% 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 third quarter were $7,077 compared to $6,344 for second quarter
1998 and $5,281 for third quarter 1997. Mortgage banking revenue through
September 30, 1998, was $14,142 and increased $7,897 or 126.5% from 1997 due to
the strong demand for new and refinanced residential mortgages and increased
loan sales. The Corporation continues to sell the majority of its 1998 loan
production in addition to approximately $100 million of Pinnacle loans sold in
the second quarter. Mortgage banking revenue was $5,211 for the third quarter
compared to $5,317 for the second quarter and $2,740 for 1997 third quarter.
Mortgage banking revenue for third quarter 1998 included a gain on servicing
rights of $1,361 from the sale of an out-of-market sub-serviced portfolio.
Insurance premiums and commissions increased $1,796 or 24.2% year-to-date from
1997 due to increased sales and experience-related profit sharing bonuses
received from insurance underwriters. Insurance premiums and commissions were
$3,118 for the most recent quarter compared to $2,328 one year ago and $2,868
for the second quarter. Trust and plan administration fees of $8,352 were
$1,452 or 21.0% higher than the first nine months of 1997 due to higher market
value of assets under management and new plans under administration.
Non-interest fees on loans increased a modest $19 from the nine months ended
September 30, 1997, primarily due to the May 30, 1997, sale of the credit card
portfolio. Investment products fees increased $68 primarily due to the January
1, 1998, acquisition of Wedgewood Partners, Inc. (Wedgewood). Net securities
gains increased $313 to $1,703 and included $295 resulting from covered call
options. Other income increased $1,587 for the nine months ended September 30,
1998, from the same period of 1997. Other income categories showing the largest
increases were bank-owned life insurance income and trading account gains.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense, which includes personnel, occupancy costs, equipment
and other operating expenses was $183,113 for the nine months ended September
30, 1998, compared to $147,669 for the same period of 1997, an increase of
$35,444. 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, and the $11,089 of merger and
other related charges incurred in third quarter 1997 by Pinnacle, non-interest
expense for the nine months ended September 30, 1998, increased $9,451 or 6.9%
from the same period
<PAGE> 13 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST EXPENSE, CONTINUED
- -------------------------------
of 1997. Non-interest expenses for the third quarter of 1998 increased $2,325
from 1998 second quarter and $3,748 or 8.1% from 1997 third quarter, excluding
the merger and other related charges.
NON-INTEREST EXPENSE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE
1998 1997 (DECREASE)
<S> <C> <C> <C>
Salaries and employee benefits $ 86,595 $ 77,136 $ 9,459
Data processing and other services 12,749 13,662 (913)
Occupancy 12,605 10,011 2,594
Equipment 14,236 7,820 6,416
Professional fees 13,356 6,929 6,427
Advertising and promotion 5,466 4,725 741
Printing and supplies 4,305 3,697 608
Telephone and data communication 3,811 3,061 750
Postage and freight 3,948 3,601 347
Amortization of intangible assets 3,509 3,362 147
Other 22,533 13,665 8,868
- ------------------------------------------------------------------------------
Total non-interest expense $ 183,113 $ 147,669 $ 35,444
==============================================================================
</TABLE>
Salaries and employee benefits increased $9,459 year-to-date September 30,
1998, from the same period of 1997. Excluding the severance and benefit
accruals recorded at Pinnacle in both second quarter 1998 and third quarter
1997, salaries and employee benefits increased $3,590 or 5.0%. The remaining
increase generally related to the January 1998 Wedgewood acquisition,
performance-based commissions and awards and normal merit increases. Data
processing and other services decreased $913 for the nine-month period.
Excluding the Pinnacle conversion costs incurred in both years, data processing
and other expenses decreased $507 on a year-to-date basis, primarily due to the
reduced expenses associated with processing credit card transactions since the
May 30, 1997, sale of the credit card portfolio. Occupancy expense increased
$2,594, principally due to office closures and building write-downs totaling
$1,781 during 1998 second quarter. Equipment expense for the nine months ended
September 30, 1998, increased $6,416 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. Professional fees
increased $6,427 for the first three quarters of 1998 compared to 1997.
Included in second quarter 1998 and third quarter 1997 were $8,153 and $1,779,
respectively, of legal, accounting and investment banker fees in connection with
mergers at Pinnacle and with Pinnacle and the Corporation. Excluding these
expenses, professional fees increased $53. Advertising and promotion increased
$741 due to increased marketing efforts related to various loan and deposit
promotions. Printing and supplies increased $608; the Pinnacle merger accounted
for $405 of that increase. Telephone and data communications increased $750 on
a year-to-date basis over 1997 due to additional communication needs with
recently completed acquisitions and the expanded distance in the Corporation's
branch and ATM network. The Pinnacle merger accounted for $84 of the $347
increase in postage and freight with the remaining increase being attributable
to higher levels of business activity. Other expenses increased $8,868 for the
nine months ended September 30, 1998, from the same period of 1997. Excluding
other expenses associated with the Pinnacle mergers and conversions, the
increase was $2,574. This increase was generally due to increased loan
origination expenses, travel and foreclosed property expenses.
<PAGE> 14 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX EXPENSE
- ------------------
Income tax expense was $22,329 for the nine months ended September 30,
1998, compared with $22,243 for the same period in 1997. The effective tax rate
was 36.7% and 35.0% for the nine months ended September 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 32.7%. 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
bank-owned life insurance.
YEAR 2000
- ----------
The Corporation is subject to risks associated with the "Year 2000"
problem, a term which refers to uncertainties about the ability of various data
processing hardware and software systems to interpret dates correctly after the
beginning of the Year 2000. The Corporation began working on its Year 2000 plan
in 1996 and formed a Project Committee (Committee) that meets weekly to review
the status of the plan. A full-time project leader has been assigned to the
project while senior management oversees it and regularly reports to the Board
of Directors. The Committee has formulated a Comprehensive Year 2000 Plan
(Plan) that includes phases relating to awareness, assessment, renovation,
validation and implementation. The Plan establishes a timetable and summarizes
each major phase of the project and the estimated costs to renovate and test
systems in preparation for the Year 2000.
The awareness phase included a Corporate-wide campaign to communicate the
problem and the potential ramifications to the organization. Concurrent with
this phase, the committee began the assessment phase which included the
inventorying of systems that may be impacted. The business use of each
inventoried item was then analyzed and prioritized in varying degrees from
critical to non-critical, based upon the perceived adverse effect on the
financial condition of the Corporation in the event of a loss or interruption in
the use of each system. The Corporation has completed the awareness and
assessment phases of the project.
The Corporation has outsourced most critical data processing activities to
an industry-known leader who is responsible for modifying its programs to be
compliant with Year 2000 processing; however, testing of those systems falls
within the scope of the Committee. Focusing on these critical systems, the
Committee has closely reviewed and monitored the vendor's progress. Year 2000
compliant upgrades to these outsourced critical data processing systems were
installed in early November 1998. Other critical systems have also been
assessed as to their Year 2000 readiness. These systems have been purchased
from other industry-known vendors and are generally used in their standard
configuration or with minor modifications. The Committee is closely reviewing
and monitoring these systems in addition to reviewing less critical systems as
to each vendor's progress and testing. A test lab has been established and
systems are being tested in a non-production environment. Certification of Year
2000 compliance for these systems has been received from approximately 90% of
all vendors including all those deemed critical. One critical outsourced
system, the human resource/payroll system, that was not Year 2000 compliant will
be replaced. The contract with this vendor will be terminated and the
Corporation is currently converting to the system of a new vendor that is
compliant for Year 2000. This conversion is progressing on schedule and is
expected to be completed by January 1999. Integrated testing on all critical
applications will continue through the first quarter of 1999. The review of
non-critical systems has begun and is expected to be completed by June 30, 1999.
With the renovation phase nearly complete, the validation and implementation
phases of all systems will continue and is expected to be completed, for
critical systems, by March 31, 1999 and for all remaining systems by June 30,
1999. A system is deemed validated upon completion of an appropriate
test plan, contingency plan and system testing of the Year 2000 compliant
version without problems.
<PAGE> 15 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000, CONTINUED
- --------------------
The Corporation's overall costs associated with Year 2000 implementation
will be reduced due to its outsourcing arrangement previously discussed;
however, incremental direct expenses are estimated to total approximately $500
during the 1998-1999 period. Additionally, capital improvements of
approximately $5,000 will be accelerated, in part due to Year 2000. The capital
improvements include replacing older technology, fully-depreciated personal
computers and software, telecommunication systems, and the new human
resource/payroll systems. Although implementation of this equipment and
software will resolve certain Year 2000 issues, they will also provide increased
or improved functionality and efficiencies. The cost of this equipment and
software is expected to be charged to expense over a 36-60 month period
commencing first quarter 1999. The aforementioned costs include the salary of
the full-time project leader but not the time of management and staff assisting
on the project which are estimated to total 6,000 hours from fourth quarter 1998
through 1999. The total cost could vary significantly from those currently
estimated for unforeseen circumstances which could develop in implementing the
Plan.
Concurrent with the development and execution of the Plan is the evolution
of the Corporation's Year 2000 Contingency Plan (Contingency Plan). The
Contingency Plan is intended to be a changing document developed based on the
on-going results of the project. The Contingency Plan, coordinated by the
Committee, currently includes the contingency procedures for critical data
processing and environmental systems and key suppliers. The Contingency Plan
will be expanded during fourth quarter 1998 to address a variety of additional
issues including credit risk, liquidity and loan and deposit customers.
The Corporation is also completing an assessment of Year 2000 risks
relating to its lines of business separate from its dependence on data
processing. This assessment includes public seminars and a review of larger
commercial customers to ascertain their overall preparedness for Year 2000. The
process requires lending and other bank officers to meet with their customers to
review and assess their overall preparedness. The failure of a commercial
customer to prepare adequately for Year 2000 could have a significant adverse
effect on such customer's operations and profitability, and inhibit its ability
to repay loans in accordance with their terms or requiring the use of its
deposited funds. While the process of evaluating the potential adverse effects
of Year 2000 risks on these customers is substantially complete, it is not
possible to quantify the overall potential effect to the Corporation.
The Plan also includes provisions which address the Year 2000 compliance of
environmental systems, which include items such as elevators, security systems
and heating and air conditioning systems. No significant business risks have
been revealed regarding these types of systems. Additional investigation is
scheduled for fourth quarter 1998 and first quarter 1999.
While the Corporation is making a substantial effort to become Year 2000
compliant, there is no assurance that the failure to adequately address all
issues relating to the Year 2000 problem would not have a material adverse
effect on its financial condition or results of operations.
LOANS
- -----
Loans totaled $3,823,764 at September 30, 1998, compared to $3,987,447 at
December 31, 1997, and $3,958,958 at September 30, 1997. The loan portfolio
decreased $163,683 from year-end 1997 and $135,194 from one year ago. Part of
the decrease was the result of the Corporation reclassifying $96,462 of
purchased SBA loans to held for sale in June 1998. At September 30, 1998
$49,863 of SBA loans remained in loans held for sale.
<PAGE> 16 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS, CONTINUED
- ----------------
Additionally, 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.
LOANS OUTSTANDING
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
<S> <C> <C> <C>
Commercial, industrial and agricultural
production loans $ 1,288,206 $ 1,281,143 $ 1,200,895
Tax exempt loans 38,268 35,070 36,462
Real estate mortgage loans:
Commercial and agricultural 395,587 389,761 369,426
Construction 147,858 129,925 120,313
Residential 1,014,923 1,280,917 1,375,625
Consumer loans 938,922 870,631 856,237
- -------------------------------------------------------------------------------------------------------
Total loans $ 3,823,764 $ 3,987,447 $ 3,958,958
=======================================================================================================
</TABLE>
Commercial loans totaled $1,288,206 at September 30, 1998, compared to
$1,281,143 at December 31, 1997 and $1,200,895 at September 30, 1997. Excluding
the reclassification of the purchased SBA loans to held for sale as previously
discussed, commercial loans increased $103,525 and $183,773 from year-end and
one year ago, respectively. Commercial loans accounted for 33.7% of the loan
portfolio at September 30, 1998 compared to 30.3% at September 30, 1997.
Real estate mortgage loans, which consist of residential, commercial and
agricultural loans secured by real estate and construction loans, totaled
$1,558,368 at September 30, 1998, compared to $1,865,364 one year prior.
Residential mortgage loans decreased $265,994 from year-end 1997 and $360,702
from one year ago. Residential mortgage loans were 26.5% of total loans at
September 30, 1998, compared to 34.7% 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 its production. The Corporation originated $172
million of residential mortgage loans in the third quarter of 1998, most of
which were or will be sold or securitized. The Corporation generally continues
to service these loans. At September 30, 1998, $1,030,989 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 $6,445 relating to $686,360 of those loans.
Consumer loans, which include installment, home equity and other lines of
credit, increased $68,291 from December 31, 1997, and $82,685 from one year ago.
Indirect installment loan balances acquired through various automobile
dealerships increased $55,060 from year-end and $66,719 from one year ago to
$306,540 at September 30, 1998. At September 30, 1998, all other installment
loans had increased $9,426 from December 31 and $3,881 from September 30, 1997
to $455,975. Home equity and other lines of credit outstandings totaled
$176,407 at September 30, 1998, an increase of $12,085 from one year ago, or
7.4%.
<PAGE> 17 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS, CONTINUED
- ----------------
The Corporation's loan portfolio contains no loans to foreign governments,
foreign enterprises, foreign operations of domestic companies, nor any
concentrations to borrowers engaged in the same or similar industries that
exceed 10% of total loans.
ASSET QUALITY
- --------------
The allowance for loan losses is maintained at a level considered adequate
by management to absorb potential loan losses by evaluations of the loan
portfolio on a continuing basis. This evaluation by management includes
consideration of past loan loss experience, changes in the composition of the
portfolio, the volume and condition of loans outstanding, expected cash flows or
the observable market price of the loans or the fair value of the collateral for
impaired loans, as well as the financial condition of specific borrowers and
current economic conditions.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
<S> <C> <C>
Beginning balance $ 55,223 $ 46,171
Balance of subsidiary at acquisition date 2,140
Adjustment to conform year-ends 501
Provision for loan losses 6,921 21,074
Loans charged-off (12,000) (11,757)
Recoveries 3,594 2,535
- ----------------------------------------------------------------------------
Ending balance $ 55,878 $ 58,524
============================================================================
Percent to total loans 1.46% 1.48%
============================================================================
</TABLE>
The allowance for loan losses was $55,878 at September 30, 1998,
representing 1.46% of total loans, compared with $55,223 at December 31, 1997,
or 1.38% of total loans. At September 30, 1997, the allowance for loan losses
was $58,524 and represented 1.48% of total loans. Annualized net charge-offs to
average loans was .29% during the nine months ended September 30, 1998, compared
to .32% for the same period of 1997. The provision for loan losses to average
loans was .24% and .74% for the nine months ended September 30, 1998 and 1997,
respectively. The allowance for loan losses to non-performing loans was 164% at
September 30, 1998, compared to 197% at December 31, 1997, and 184% at September
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 September 30, 1998, totaled
$34,104, an increase of $6,130 from December 31, 1997. The increase is
generally due to management's continuing review of criticized loans and placing
on non-accrual status, several smaller loans, acquired with the Pinnacle merger.
The non-performing loans to total loans ratio was .89% on September 30, 1998, as
compared to
<PAGE> 18 OF 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ASSET QUALITY, CONTINUED
- ------------------------
.70% on December 31, 1997, and .80% on September 30, 1997. Total
risk assets equaled 1.25% of loan-related assets at September 30, 1998, compared
to 1.11% at December 31, 1997. In addition to loans classified as risk assets,
there were other loans totaling $11,970 at September 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.
NON-PERFORMING AND RISK ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
<S> <C> <C> <C>
Non-accrual loans:
Commercial, agricultural and tax exempt $ 16,444 $ 12,801 $ 15,840
Real estate mortgage 13,460 12,115 12,704
Consumer 3,240 1,657 1,628
--------------- -------------- ---------------
Total non-accrual 33,144 26,573 30,172
Restructured loans 960 1,401 1,622
--------------- -------------- ---------------
Total non-performing loans 34,104 27,974 31,794
Foreclosed properties 6,042 6,703 5,025
--------------- -------------- ---------------
Total non-performing assets 40,146 34,677 36,819
90 days or more past due and accruing:
Commercial, agricultural and tax exempt 2,334 2,372 5,208
Real estate mortgage 3,689 5,427 3,461
Consumer 1,721 1,683 2,108
--------------- -------------- ---------------
Total 90 days or more past due 7,744 9,482 10,777
--------------- -------------- ---------------
Total risk assets $ 47,890 $ 44,159 $ 47,596
==========================================================================================
Risk assets to loan-related assets 1.25% 1.11% 1.20%
==========================================================================================
</TABLE>
INVESTMENT SECURITIES
- ---------------------
Total investment securities available for sale and held to maturity
represented 37% of earning assets at September 30, 1998, compared to 34% and 35%
at December 31, 1997, and September 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 5.0 years and 6.0 years, respectively,
at September 30, 1998. Additional state and municipal securities have also been
purchased due to their higher tax equivalent yields.
<PAGE> 19 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 $4,829,982 at September 30, 1998, compared to
$4,615,062 and $4,522,700 at December 31, 1997, and September 30, 1997,
respectively. Since December 31, 1997, interest bearing deposits increased
$202,545 and non-interest bearing deposits increased $12,375. 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 of trends. Average interest bearing deposits
increased $51,080 and non-interest bearing deposits increased $68,414 for the
nine months ended September 30, 1998 over the same period of 1997. Customer
preference has shifted to money market deposit accounts due to new product
features, the flat yield curve and Corporate promotions. Accordingly,
year-to-date average money market deposit accounts increased $165,476 from 1997
and savings and certificates of deposit account averages declined $59,623 and
$75,438, respectively. Average interest checking accounts rose $20,665.
Securities sold under repurchase agreements are acquired in national
markets as well as from the Corporation's commercial customers as part of a cash
management service. Repurchase agreements were $523,318, $586,855 and $711,160
at September 30, 1998, December 31, 1997, and September 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 $638,573 at September 30, 1998, compared to $726,658
at December 31, 1997, and $690,473 at September 30, 1997. Advances from the
FHLB accounted for $626,045 of total long-term debt at September 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 September
30, 1998, the Corporation had $302,385 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 September 30, 1998, the entire $50,000 of the
line of credit remained available for future use.
<PAGE> 20 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 September 30, 1998, was $537,334,
compared to $515,463 at December 31, 1997 and $499,551 at September 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 September 30, 1998, the Corporation
and its banking subsidiaries exceeded all regulatory capital adequacy
requirements to which they were subject.
As of September 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 consolidated financial statements, qualify as Tier 1 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 September 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 $700,211 16.58% $337,869 8.00% $422,336 10.00%
Tier 1 Capital to risk weighted assets 647,419 15.33 168,934 4.00 253,402 6.00
Tier 1 Capital to average assets
(leverage ratio) 647,419 9.75 265,506 4.00 331,883 5.00
</TABLE>
<PAGE> 21 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> 22 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 NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibits
--------
a. The following exhibit is submitted herewith:
27 - Financial Data Schedule
Reports on Form 8-K
-------------------
b. No reports were filed.
- --------------------------------------------------------------------------------
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 November 9, 1998 by /s/ James J. Giancola
--------------------- ---------------------------
James J. Giancola,
President and Chief Executive Officer
Date November 9, 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
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Note: This schedule contains summary financial information extracted from
CNB Bancshares, Inc.'s consolidated balance sheet as of September 30,
1998, and the consolidated statement of income for the nine months
ended September 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 164531
<INT-BEARING-DEPOSITS> 2269
<FED-FUNDS-SOLD> 6000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2186065
<INVESTMENTS-CARRYING> 198554
<INVESTMENTS-MARKET> 207382
<LOANS> 3983731
<ALLOWANCE> 55878
<TOTAL-ASSETS> 6844521
<DEPOSITS> 4829982
<SHORT-TERM> 605798
<LIABILITIES-OTHER> 60334
<LONG-TERM> 638573
172500
0
<COMMON> 35923
<OTHER-SE> 501411
<TOTAL-LIABILITIES-AND-EQUITY> 6844521
<INTEREST-LOAN> 263222
<INTEREST-INVEST> 104338
<INTEREST-OTHER> 745
<INTEREST-TOTAL> 368305
<INTEREST-DEPOSIT> 141128
<INTEREST-EXPENSE> 194352
<INTEREST-INCOME-NET> 173953
<LOAN-LOSSES> 6921
<SECURITIES-GAINS> 1703
<EXPENSE-OTHER> 183113
<INCOME-PRETAX> 59177
<INCOME-PRE-EXTRAORDINARY> 59177
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36848
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.91
<LOANS-NON> 33144
<LOANS-PAST> 7744
<LOANS-TROUBLED> 960
<LOANS-PROBLEM> 11970
<ALLOWANCE-OPEN> 55223
<CHARGE-OFFS> 12000
<RECOVERIES> 3594
<ALLOWANCE-CLOSE> 55878
<ALLOWANCE-DOMESTIC> 55878
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Note: This schedule contains summary financial information extracted from
CNB Bancshares, Inc.'s consolidated balance sheet as of September 30,
1997, and the consolidated statement of income for the nine months
ended September 30, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 89861
<INT-BEARING-DEPOSITS> 9047
<FED-FUNDS-SOLD> 575
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1950286
<INVESTMENTS-CARRYING> 237387
<INVESTMENTS-MARKET> 241538
<LOANS> 3986455
<ALLOWANCE> 58524
<TOTAL-ASSETS> 6591750
<DEPOSITS> 4522700
<SHORT-TERM> 819683
<LIABILITIES-OTHER> 59343
<LONG-TERM> 690473
0
0
<COMMON> 33254
<OTHER-SE> 466297
<TOTAL-LIABILITIES-AND-EQUITY> 6591750
<INTEREST-LOAN> 257967
<INTEREST-INVEST> 112256
<INTEREST-OTHER> 1084
<INTEREST-TOTAL> 371307
<INTEREST-DEPOSIT> 142973
<INTEREST-EXPENSE> 198645
<INTEREST-INCOME-NET> 172662
<LOAN-LOSSES> 21074
<SECURITIES-GAINS> 1390
<EXPENSE-OTHER> 147669
<INCOME-PRETAX> 63480
<INCOME-PRE-EXTRAORDINARY> 63480
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41237
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 3.91
<LOANS-NON> 30172
<LOANS-PAST> 10777
<LOANS-TROUBLED> 1622
<LOANS-PROBLEM> 13180
<ALLOWANCE-OPEN> 46171
<CHARGE-OFFS> 11757
<RECOVERIES> 2535
<ALLOWANCE-CLOSE> 58524
<ALLOWANCE-DOMESTIC> 55569
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2955
</TABLE>
