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
MARCH 31, 1999
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 April 30, 1999, there were 34,949,812 outstanding shares, without par
value, of the registrant.
Exhibit index is on page 26.
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 . . . . 5-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . 12-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . 23
PART II. Other Information . . . . . . . . . . . . . . . . . . 24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Page
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except for share data)
(Unaudited)
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
---------- ------------- ----------
<S> <C> <C> <C>
ASSETS
- ------
Cash and due from banks $ 152,126 $ 193,696 $ 189,948
Federal funds sold and other short-term investments 7,710 33,912 20,820
---------- ---------- ----------
TOTAL CASH AND CASH EQUIVALENTS 159,836 227,608 210,768
Loans held for sale 66,434 107,138 51,959
Investment securities available for sale 2,783,470 2,592,120 1,866,530
Investment securities held to maturity
(Fair value $226,187 at March 31, 1998) 220,967
Loans 3,882,985 3,891,269 3,941,007
Less: Allowance for loan losses 56,144 56,271 55,208
---------- ---------- ----------
NET LOANS 3,826,841 3,834,998 3,885,799
Premises and equipment 101,861 101,160 105,134
Intangible assets 50,775 51,185 50,856
Interest receivable 47,253 49,475 45,081
Other assets 182,326 178,113 142,896
---------- ---------- ----------
TOTAL ASSETS $7,218,796 $7,141,797 $6,579,990
========== ========== ==========
LIABILITIES
- -----------
Deposits:
Non-interest bearing $ 520,990 $ 577,108 $ 480,064
Interest bearing 4,396,850 4,381,229 4,201,421
---------- ---------- ----------
TOTAL DEPOSITS 4,917,840 4,958,337 4,681,485
Securities sold under repurchase agreements 851,859 697,960 537,547
Federal funds purchased and other short-term borrowings 113,135 105,831 126,109
FHLB advances and other long-term debt 595,502 626,759 658,410
Interest payable and other liabilities 50,331 53,364 51,804
---------- ---------- ----------
TOTAL LIABILITIES 6,528,667 6,442,251 6,055,355
Guaranteed preferred beneficial interests in the Corporation's
convertible subordinated debentures 172,500 172,500
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $1 stated value
Shares authorized: 100,000,000
Shares issued: 35,087,722 at March 31, 1999, 35,482,969 at
December 31, 1998, and 33,540,415 at March 31, 1998 35,088 35,483 33,540
Capital surplus 379,674 396,795 363,204
Retained earnings 99,757 83,612 122,244
Accumulated other comprehensive income - net unrealized
gains on investment securities available for sale 3,110 11,156 5,647
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 517,629 527,046 524,635
---------- ---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $7,218,796 $7,141,797 $6,579,990
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
PAGE 1 OF 28
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except for share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ -----------
<S> <C> <C>
INTEREST INCOME
Loans, including fees:
Taxable $ 82,057 $ 87,108
Tax exempt 590 540
Loans held for sale 2,083 752
Investment securities:
Taxable 34,892 30,741
Tax exempt 6,034 3,665
Federal funds sold and other short-term investments 131 117
------------ -----------
Total interest income 125,787 122,923
INTEREST EXPENSE
Deposits 45,208 47,292
Short-term borrowings 10,293 9,038
FHLB advances and other long-term debt 8,491 9,478
------------ -----------
Total interest expense 63,992 65,808
------------ -----------
NET INTEREST INCOME 61,795 57,115
Provision for loan losses 1,531 3,316
------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 60,264 53,799
NON-INTEREST INCOME
Service charges on deposit accounts 7,639 5,420
Mortgage banking revenue 4,608 3,614
Insurance premiums and commissions 3,200 3,245
Trust and plan administration fees 3,114 2,552
Investment products fees 1,772 1,575
Non-interest fees on loans 1,701 1,508
Net securities gains 366 633
Other 6,573 4,254
------------ -----------
Total non-interest income 28,973 22,801
------------ -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 27,298 24,960
Data processing and other services 4,318 3,573
Occupancy 3,890 3,663
Equipment 3,076 3,123
Professional fees 2,137 1,801
Advertising and promotion 1,604 1,635
Postage and freight 1,351 1,360
Printing and supplies 1,269 1,194
Telecommunication 1,198 1,154
Amortization of intangible assets 1,163 1,157
Other 3,941 4,266
------------ -----------
Total non-interest expense 51,245 47,886
------------ -----------
INCOME BEFORE INCOME TAXES 37,992 28,714
Income taxes 11,708 9,133
------------ -----------
26,284 19,581
Distribution pertaining to guaranteed preferred beneficial interests in
the Corporation's convertible subordinated debentures, net of tax 1,641
------------ -----------
NET INCOME $ 24,643 $ 19,581
============ ===========
NET INCOME PER SHARE:
BASIC $ 0.70 $ 0.56
============ ===========
DILUTED $ 0.68 $ 0.55
============ ===========
AVERAGE SHARES OUTSTANDING:
BASIC 35,279,724 35,231,097
============ ===========
DILUTED 38,916,896 35,633,396
============ ===========
See notes to consolidated financial statements.
</TABLE>
PAGE 2 OF 28
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
BEGINNING BALANCE $527,046 $515,463
Comprehensive income:
Net income 24,643 19,581
Other comprehensive loss - change in unrealized
gains on investment securities available for sale (8,046) (1,002)
-------- --------
Comprehensive income 16,597 18,579
Cash dividends declared (8,499) (7,679)
Issuance of common stock for:
Stock options exercised 539 2,835
Acquisitions 3,126
Purchase and retirement of common stock (19,031) (9,794)
Other 977 2,105
-------- --------
ENDING BALANCE $517,629 $524,635
======== ========
See notes to consolidated financial statements.
</TABLE>
PAGE 3 OF 28
<TABLE>
<CAPTION>
CNB BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 24,643 $ 19,581
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,071 5,129
Provision for loan losses 1,531 3,316
Amortization of premiums and discounts on securities 2,240 1,110
Net securities gains (366) (633)
Loans originated for sale (180,764) (247,007)
Proceeds from sale of loans 221,468 245,871
Decrease (increase) in interest receivable and other assets, net of amortization (3,934) 2,239
Increase (decrease) in interest payable and other liabilities 5,165 (4,500)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 75,054 25,106
--------- --------
INVESTING ACTIVITIES:
Cash and cash equivalents of subsidiaries acquired, net of purchase price 876
Principal payments received on investment securities available for sale 175,928 254,853
Proceeds from the sale of investment securities available for sale 423,234 397,692
Purchase of investment securities available for sale (805,779) (666,860)
Principal payments received on investment securities held to maturity 9,843
Net decrease in loans 5,026 46,384
Purchase of premises and equipment (3,469) (3,708)
--------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (205,060) 39,080
--------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (40,617) 66,196
Net increase (decrease) in short-term borrowings 161,099 (17,690)
Payment and maturity of FHLB advances and other long-term debt (54,466) (159,180)
Proceeds from FHLB advances and other long-term borrowings 23,209 90,932
Cash dividends paid (8,499) (7,679)
Proceeds from exercise of stock options 539 2,835
Purchase and retirement of common stock (19,031) (9,794)
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 62,234 (34,380)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (67,772) 29,806
CASH AND CASH EQUIVALENTS AT JANUARY 1, 227,608 180,962
--------- --------
CASH AND CASH EQUIVALENTS AT MARCH 31, $ 159,836 $ 210,768
========= =========
Supplemental disclosure:
Cash paid for:
Interest $ 63,591 $ 64,578
Income taxes 2,321 1,441
Non-cash investing and financing activities:
Common stock issued for acquisitions 3,126
Stock issued pursuant to employee incentive plans 977 1,530
See notes to consolidated financial statements.
</TABLE>
PAGE 4 OF 28
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 1998 Annual Report to Shareholders.
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 Financial
Services, Inc. (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.
On December 31, 1998, the Corporation combined the charters of its eight
subsidiary banks into one Michigan state bank charter under the name of Citizens
Bank of MidAmerica. Effective April 22, 1999, the name of the bank was changed
to Civitas Bank.
On March 31, 1999, the Corporation and First Indiana Bank announced the
signing of a definitive agreement whereby the Corporation will acquire deposits
totaling approximately $130 million and the five First Indiana Bank offices
located in the Evansville, Indiana, area. The transaction will be accounted for
under the purchase method of accounting and, subject to regulatory approval, is
expected to be completed in the third quarter of 1999.
PAGE 5 OF 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3: INVESTMENT SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for Sale at March 31, 1999:
U.S. Treasury $ 14,962 $ 200 $ (239) $ 14,923
Federal agencies:
Bonds and notes 150,455 244 (328) 150,371
Mortgage-backed securities 1,985,594 7,709 (12,287) 1,981,016
State and municipal 494,556 14,218 (2,557) 506,217
Collateralized mortgage obligations 32,491 325 (1,201) 31,615
Equity securities 99,281 58 (1,160) 98,179
Other securities 1,147 16 (14) 1,149
- -----------------------------------------------------------------------------------------
Total $2,778,486 $ 22,770 $ (17,786) $2,783,470
=========================================================================================
</TABLE>
The carrying value of investment securities at March 31, 1999, by
contractual maturity, except for mortgage-backed securities and collateralized
mortgage obligations, which are based on estimated average lives, are shown in
the following table. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Maturity distribution
At March 31, 1999:
Due in one year or less $ 9,906 $ 10,057
Due after one year through five years 49,421 50,547
Due after five years through ten years 262,521 268,789
Due after ten years 339,272 343,267
Mortgage-backed securities 1,985,594 1,981,016
Collateralized mortgage obligations 32,491 31,615
- -------------------------------------------------------------------------
Total debt securities 2,679,205 2,685,291
Equity securities 99,281 98,179
- -------------------------------------------------------------------------
Total $2,778,486 $2,783,470
=========================================================================
</TABLE>
Proceeds from sales of investment securities available for sale during the
three months ended March 31, 1999 and 1998 were $423,234 and $397,692,
respectively. Gross gains and (losses) realized on those sales were $1,177 and
($811), respectively, for the three months ended March 31, 1999 and $969 and
($336) for the three months ended March 31, 1998, respectively.
PAGE 6 OF 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4: IMPAIRED LOANS
At March 31, 1999, impaired loans totaled $39,406. An allowance for loan
losses of $3,678 was recorded for impaired loans totaling $13,056. At December
31, 1998, impaired loans totaled $39,823. An allowance of $2,506 was recorded
for impaired loans totaling $13,868. The average balance for impaired loans was
$38,835 for the three months ended March 31, 1999.
NOTE 5: LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
----------- ----------- ----------
<S> <C> <C> <C>
Parent Company:
Notes payable, unsecured:
Variable rate adjusted with changes in LIBOR, payable $250 quarterly
through 2000 (5.47%, 6.13% and 6.19% at March 31, 1999,
December 31, 1998, and March 31, 1998, respectively) $ 2,250 $ 2,500 $ 3,250
Variable rate adjusted with changes in LIBOR (6.19% at
March 31, 1998) 40,000
Subsidiaries:
Federal Home Loan Bank advances, due at various dates through 2018
(weighted average rates of 5.41%, 5.46% and 5.57% at March 31,
1999, December 31, 1998, and March 31, 1998, respectively) 582,635 614,201 604,942
Other, including capitalized leases 10,617 10,058 10,218
- -----------------------------------------------------------------------------------------------------------------
Total $ 595,502 $ 626,759 $ 658,410
=================================================================================================================
</TABLE>
Qualifying, unencumbered mortgage assets up to 160% 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 6: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
CONVERTIBLE SUBORDINATED DEBENTURES
In June 1998, the Corporation issued $172,500 of Guaranteed Preferred
Beneficial Interests in the Corporation's Convertible Subordinated Debentures
(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%, or $.375 per share, 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.
Page 7 of 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
CONVERTIBLE SUBORDINATED DEBENTURES, CONTINUED
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 back-up obligations of the Corporation with respect to the
trust preferred securities constitute, in the aggregate, a full 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.
Costs associated with the issuance of the trust preferred securities
totaling $4,847 were capitalized and are being amortized through the maturity
date of the securities. The unamortized balance is included in other assets on
the Corporation's Consolidated Balance Sheet.
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.
Page 8 of 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7: 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 per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
NUMERATOR:
For basic net income per share - Net income $ 24,643 $ 19,581
Effect of dilutive securities:
Trust preferred securities 1,641
- ---------------------------------------------------------------------------
For diluted net income per share - Net income
after assumed conversions $ 26,284 $ 19,581
===========================================================================
DENOMINATOR (SHARES IN THOUSANDS):
For basic net income per share - Average shares
outstanding 35,280 35,231
Effect of dilutive securities:
Trust preferred securities and stock options 3,637 402
- ---------------------------------------------------------------------------
For diluted net income per share - Average
shares outstanding after assumed conversions 38,917 35,633
===========================================================================
</TABLE>
NOTE 8: COMPREHENSIVE INCOME
The Corporation's other comprehensive income included the following
components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Net realized and unrealized losses on available for
sale securities $ (7,818) $ (626)
Less: Adjustment for net securities gains realized
in net income, net of tax 228 376
- ------------------------------------------------------------------------------
Other comprehensive loss $ (8,046) $(1,002)
==============================================================================
</TABLE>
Page 9 of 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: INTEREST RATE CONTRACTS
The Corporation has entered into interest rate swaps (swaps) as a hedge
against changing interest rates. Swaps represent an exchange of interest
payments and the underlying principal balances of the assets or liabilities are
not affected. At March 31, 1999, the Corporation had swaps with a notional
value of $490,000 of which $440,000 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. Swaps with a notional amount of $50,000 require
the Corporation to pay a variable rate of interest based on the prime rate of
interest and receive a 7.72% fixed rate. The swaps terminate on or prior to
April 7, 2005. The Corporation realized $362 in net expense from swaps during
the three months ended March 31, 1999. The estimated market loss of the swaps
at March 31, 1999, was $4,684.
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.
NOTE 10: SEGMENT INFORMATION
As previously discussed in Note 2, the Corporation combined its eight
subsidiary banks into one charter effective December 31, 1998. As a result of
that combination, the Bank restructured its former subsidiary banks into
divisions that establish more logical banking regions and place common markets
together, without regard to state lines. Management uses loan and deposit
average balances, net contribution and related growth rates and financial ratios
to measure performance of each division. The following table shows the
financial information of the Corporation's reportable segments for the periods
ended March 31, 1999 and March 31, 1998. The "Other" column includes the Parent
Company, all segments not required to be disclosed separately and all
intercompany elimination entries.
PAGE 10 OF 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10: SEGMENT INFORMATION, CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
West. KY/
Evansville Northern Central So. IL Treasury Other Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income $ 20,104 $ 16,247 $ 10,335 $ 6,495 $ 4,588 $ 4,026 $ 61,795
Provision for loan losses 835 1,277 138 172 (891) 1,531
Non-interest income 6,111 5,828 3,872 2,015 3,364 7,783 28,973
Non-interest expense 15,139 12,393 8,789 5,546 348 9,030 51,245
Income taxes 3,714 3,136 1,955 1,014 2,890 (1,001) 11,708
Distribution on trust
preferred securities 1,641 1,641
Net contribution 6,527 5,269 3,325 1,778 4,714 3,030 24,643
AVERAGE BALANCES:
Loans 1,459,728 1,136,102 720,897 408,440 146,971 3,872,138
Assets 2,113,744 1,544,377 997,801 709,181 1,361,664 357,441 7,084,208
Deposits 1,813,877 1,421,599 892,937 606,760 90,048 37,883 4,863,104
FINANCIAL RATIOS:
Return on assets 1.24% 1.36% 1.33% 1.00% 1.39%
Efficiency ratio 58 56 62 65 54
THREE MONTHS ENDED MARCH 31, 1998
West. KY/
Evansville Northern Central So. IL Treasury Other Consolidated
- ------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Net interest income $ 16,850 $ 17,096 $ 9,468 $ 5,955 $ 4,660 $ 3,086 $ 57,115
Provision for loan losses 1,594 1,461 1,447 826 (2,012) 3,316
Non-interest income 5,087 3,898 2,837 1,899 2,431 6,649 22,801
Non-interest expense 12,327 14,145 7,203 4,999 330 8,882 47,886
Income taxes 2,917 1,941 1,336 708 2,569 (338) 9,133
Net contribution 5,099 3,447 2,319 1,321 4,192 3,203 19,581
AVERAGE BALANCES:
Loans 1,200,565 1,455,545 696,888 379,686 96,166 116,652 3,945,502
Assets 1,726,234 1,617,844 926,248 666,730 1,161,653 432,332 6,531,041
Deposits 1,552,688 1,494,169 838,618 591,542 96,790 35,060 4,608,867
FINANCIAL RATIOS:
Return on assets 1.18% 0.85% 1.00% 0.79% 1.20%
Efficiency ratio 56 67 59 64 58
</TABLE>
PAGE 11 OF 28
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 March 31, 1999, was $24,643 compared
to $24,723 and $19,581 for the three months ended December 31, 1998 and March
31, 1998, respectively. Diluted net income per share for first quarter 1999 was
$.68 compared to $.67 for fourth quarter 1998 and $.55 for first quarter 1998.
Net interest income increased $4,680, or 8.2%, over the first three months of
1998 primarily due to growth in earning assets of 8.5%. This growth was funded
primarily by the June 23, 1998 issuance of the trust preferred securities,
discussed in Note 6 to the financial statements. The provision for loan losses
was $1,531 for 1999 first quarter compared to $3,316 for 1998 first quarter.
Non-interest income increased $6,172, or 27.1%, from first quarter 1998, and
non-interest expenses increased $3,359, or 7.0%, for the same period.
The Corporation's average assets for the three months ended March 31, 1999,
were $7,084,208, an increase of $125,175 over the $6,959,033 average for the
quarter ended December 31, 1998, and an increase of $553,167 from the average of
$6,531,041 for the quarter ended March 31, 1998.
The annualized returns on average assets and shareholders' equity for the
quarter ended March 31, 1999, were 1.39% and 19.32%, respectively, compared to
1.20% and 15.30%, respectively, for the first quarter of 1998.
Cash dividends of $.24 per share were declared during the first quarter of
1999, representing an increase of 9.1% from the $.22 per share for the same
period of 1998. Total dividends declared for the first quarters of 1999 and
1998 were $8,499 and $7,679, 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 $61,795 for the three months ended March 31, 1999, compared with
$57,115 for the same period in 1998. The increased net interest income was
primarily the result of average earning assets increasing 8.5%. This growth was
funded primarily by the issuance of the trust preferred securities. Net
interest income for the most recent quarter was $516 less than the $62,311
recorded in the fourth quarter of 1998 due to a lower net interest margin
partially offset by a $101,500 increase in average earning assets.
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 3.92%, 4.00%, and 3.85%,
respectively, for the three months ended March 31, 1999, December 31, 1998, and
March 31, 1998. Average earning assets of $6,602,984 were $101,500 and $516,810
higher than fourth quarter 1998 and first quarter 1998, respectively. Loans
comprised 58.6% of average earning assets for the most recent quarter compared
to 64.8% for 1998 first quarter. Average investment securities represented
39.7% of earning assets for the quarter ended March 31, 1999 and 34.0% for the
same quarter of 1998.
The yield on earning assets decreased 16 basis points (b.p.) to 7.84% from
fourth quarter 1998 primarily due to the 75 b.p. reduction in the prime interest
rate which occurred in fourth quarter 1998. Interest expense to earning assets,
however, fell by only 8 b.p. from fourth quarter 1998 as the interest bearing
liabilities did not reprice downward as quickly as the earning assets due to the
prime interest rate reductions. The increased net interest margin from 1998
first quarter was primarily due to the issuance of the trust preferred
securities partially offset by the pressure on the margin caused by the prime
interest rate reductions discussed above.
Page 12 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INTEREST INCOME, CONTINUED
- ------------------------------
NET INTEREST MARGIN
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
<S> <C> <C> <C>
Yields (FTE)
Loans 8.60% 8.85% 8.95%
Securities 6.71 6.73 6.98
Other earning assets 7.90 7.09 4.83
--------- --------- ---------
Total earning assets 7.84 8.00 8.23
Cost of funds
Interest bearing deposits 4.23 4.38 4.61
Other interest bearing liabilities 5.08 5.17 5.46
--------- --------- ---------
Total interest bearing liabilities 4.45 4.57 4.83
--------- --------- ---------
Total interest expense to earning assets 3.92 4.00 4.38
- --------------------------------------------------------------------------------------------
Net interest margin 3.92% 4.00% 3.85%
============================================================================================
</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 negative gap on March 31, 1999, of $298,953 which
represented 4.4% of the $6,740,599 in earning assets at that date. Net interest
income at financial institutions with negative gaps tends to increase in periods
of falling interest rates and decline as interest rates rise. Management also
utilizes a simulation model to measure the Corporation's net interest income
sensitivity 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 2.1% 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 continues to be an increasingly significant portion of
revenue for the Corporation and represented 30.8% of net FTE revenues for the
three months ended March 31, 1999, compared to 27.9% for the same period of
1998. Non-interest income for the three months ended March 31, 1999, was
$28,973 which increased $6,172 from the same period of 1998. Net securities
gains of $366 were recorded during the first quarter of 1999 compared to $633
for the first three months of 1998. Excluding securities gains, non-interest
income for the first quarter of 1999 totaled $28,607, which represented a 29.0%
increase over the first quarter of 1998. Non-interest income, excluding
securities gains, for the most recent quarter fell slightly by $751 from the
seasonally high fourth quarter of 1998.
PAGE 13 OF 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST INCOME, CONTINUED
- ------------------------------
NON-INTEREST INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, INCREASE
1999 1998 (DECREASE)
<S> <C> <C> <C>
Service charges on deposit accounts $ 7,639 $ 5,420 $ 2,219
Mortgage banking revenue 4,608 3,614 994
Insurance premiums and commissions 3,200 3,245 (45)
Trust and plan administration fees 3,114 2,552 562
Investment products fees 1,772 1,575 197
Non-interest fees on loans 1,701 1,508 193
Net securities gains 366 633 (267)
Other 6,573 4,254 2,319
- --------------------------------------------------------------------------
Total non-interest income $ 28,973 $ 22,801 $ 6,172
==========================================================================
</TABLE>
Service charges on deposit accounts increased $2,219, or 40.9% from 1998
due to an increased number of deposit accounts and chargeable services, higher
activity fees and new fee sources combined with improved efforts to collect a
greater percentage of assessable fees. Mortgage banking revenue was $4,608 and
increased $994, or 27.5%, from 1998 first quarter due to the strong demand for
new and refinanced residential mortgages and increased loan sales. The
Corporation sold or securitized the majority of its mortgage loan production
during the quarter. Mortgage banking revenue was $1,924 less than the record
fourth quarter of 1998 primarily due to lower production volumes related to
seasonality. Insurance premiums and commissions declined $45 from the three
months ended March 31, 1998. Experience-related profit sharing bonuses received
from insurance underwriters decreased from the first quarter of 1998 by $269.
Excluding those bonuses, insurance premiums and commissions increased $224, or
8.8%. Trust and plan administration fees of $3,114 were $562, or 22.0% higher
than the first three months of 1998, due to a higher market value of assets
under management and new plans under administration. Investment products fees
increased $197, or 12.5%, primarily due to increased efforts to cross sell these
products to the Corporation's customer base and an increased number of sales
representatives. Non-interest fees on loans increased $193 from the three
months ended March 31, 1998, primarily due to increased letter of credit fees.
Other income increased $2,319 during the most recent quarter over the same
period of 1998. Categories of other income showing increases were bank-owned
life insurance income, trading account gains, fees on covered call options,
gains on foreclosed property sales, customer check sales and debit card fees.
Other income also included gains of $750 on the sale of the credit card
portfolios acquired with recent bank acquisitions.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense, which includes personnel, occupancy costs, equipment
and other operating expenses was $51,245 for the three months ended March 31,
1999, compared to $47,886 for the same period of 1998, an increase of $3,359, or
7.0%. Non-interest expenses for the quarter increased $1,882 from 1998 fourth
quarter, or 15.3% on an annualized basis, primarily due to accrual reductions
recorded in the fourth quarter related to incentive compensation plans tied to
annual net income.
Page 14 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST EXPENSE, CONTINUED
- -------------------------------
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, INCREASE
1999 1998 (DECREASE)
<S> <C> <C> <C>
Salaries and employee benefits $ 27,298 $ 24,960 $ 2,338
Data processing and other services 4,318 3,573 745
Occupancy 3,890 3,663 227
Equipment 3,076 3,123 (47)
Professional fees 2,137 1,801 336
Advertising and promotion 1,604 1,635 (31)
Postage and freight 1,351 1,360 (9)
Printing and supplies 1,269 1,194 75
Telecommunication 1,198 1,154 44
Amortization of intangible assets 1,163 1,157 6
Other 3,941 4,266 (325)
- -------------------------------------------------------------------------------
Total non-interest expense $ 51,245 $ 47,886 $ 3,359
===============================================================================
</TABLE>
Salaries and employee benefits increased $2,338 from the same period of
1998. The increase is due to an increased number of associates, increased
performance-based commissions and awards and normal merit increases. Salaries
and employee benefits increased $2,814 from fourth quarter 1998 due to accrual
reductions recorded in the fourth quarter on incentive compensation plans tied
to increases in year-over-year earnings per share. Data processing and other
services increased $745 for the three-month period over 1998's like period due
to increased expenses associated with computer software and the operation of
additional ATM's. Occupancy expense increased $227, principally due to
operating additional office locations. Professional fees increased $336 for the
first three months of 1999 compared to 1998 due to increases in legal fees and
expenses associated with potential acquisitions by the Corporation. Printing
and supplies increased $75 due to increased business activity. Other expenses
decreased $325 for the three months ended March 31, 1999, from the same period
of 1998. This decrease was generally due to lower costs associated with
examination fees, insurance, foreclosed properties and operating losses.
INCOME TAX EXPENSE
- ------------------
Income tax expense was $11,708 for the three months ended March 31, 1999,
compared with $9,133 for the same period in 1998 and $12,727 for the three
months ended December 31, 1998. The effective tax rate was 30.8% for the three
months ended March 31, 1999, and 32.6% and 31.8% for the three months ended
December 31, 1998 and March 31, 1998, respectively. The reduced effective tax
rate in 1999 was primarily due to the state income tax savings achieved when the
Corporation combined the charters of its eight subsidiary banks into one
Michigan state bank charter on December 31, 1998. The decline in the effective
tax rate was also aided by an increase in income from tax exempt sources,
including municipal investments and bank-owned life insurance.
Page 15 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS
- -----
Loans totaled $3,882,985 at March 31, 1999, compared to $3,891,269 at
December 31, 1998, and $3,941,007 at March 31, 1998. The loan portfolio
decreased $8,284 from year-end 1998 and $58,022 from one year ago. 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 generate fee income by the sales and retained
servicing.
LOANS OUTSTANDING
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
<S> <C> <C> <C>
Commercial, industrial and agricultural
production loans $1,325,136 $1,344,110 $1,321,243
Tax exempt loans 39,669 40,122 34,776
Real estate mortgage loans:
Commercial and agricultural 459,487 435,129 410,592
Construction 168,048 155,756 109,080
Residential 957,423 976,586 1,197,282
Consumer loans 933,222 939,566 868,034
- -----------------------------------------------------------------------------
Total loans $3,882,985 $3,891,269 $3,941,007
=============================================================================
</TABLE>
Commercial loans totaled $1,325,136 at March 31, 1999, compared to
$1,344,110 at December 31, 1998, and $1,321,243 at March 31, 1998. Included in
this category are lines of credit to mortgage companies which are secured by
mortgage loans with agreements to resell. These mortgage lines have declined by
$42,830 since December 31, 1998, due to seasonal demands and management applying
more stringent underwriting standards. Excluding these mortgage lines,
commercial loans increased $23,406 from year-end. In June 1998, the Corporation
reclassified $96,462 of purchased SBA loans to held for sale. Excluding this
reclassification and the mortgage repurchasing loans, commercial loans increased
$167,564, or 16.5%, from one year ago. At March 31, 1999, $16,722 of SBA loans
remained classified as held for sale. Commercial loans accounted for 34.1% of
the loan portfolio at March 31, 1999 compared to 33.5% at March 31, 1998.
Real estate mortgage loans, which consist of residential, commercial and
agricultural loans secured by real estate and construction loans, totaled
$1,584,958 at March 31, 1999, compared to $1,716,954 one year prior.
Residential mortgage loans decreased $19,163 from year-end 1998 and $239,859
from one year ago. Residential mortgage loans were 24.7% of total loans at March
31, 1999, compared to 30.4% one year prior. Demand for new and refinanced
residential mortgage loans slowed somewhat from the record fourth quarter 1998,
primarily due to seasonality, but still remained strong. The Corporation
originated $166 million of residential mortgage loans in the first quarter of
1999, most of which was sold or securitized. The Corporation generally
continues to service these loans. At March 31, 1999, $1,131,827 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 $8,208 relating to $849,548 of those loans.
Consumer loans, which include installment, home equity and other lines of
credit, increased $65,188 from one year ago, but decreased $6,344 from December
31, 1998. The decline from year-end was primarily the result
PAGE 16 OF 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS, CONTINUED
- ----------------
of the sale of the credit card portfolios acquired through recent bank mergers
totaling $6,837. Indirect installment loan balances acquired through various
automobile dealerships increased $5,139 from year-end and $69,640 from one
year ago to $324,749 at March 31, 1999. At March 31, 1999, all other
installment loans had decreased $5,149 from December 31 and $3,928 from
March 31, 1998 to $439,465. Home equity and other lines of credit outstandings
totaled $169,008 at March 31, 1999, a decrease of $6,334 from December 31 and
$524 from one year ago, due to the credit card sale.
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 as determined by evaluations of
the loan portfolio on a continuing basis. This evaluation by management
includes the use of a model maintained by the Corporation's loan review
function. The model calculates reserves for specific loan categories classified
as "criticized" and for all remaining loans in the portfolio. The model
utilizes historical loss ratios updated annually, based on a rolling three years
of actual loss experience for "criticized" loans, and updated quarterly based on
the actual loss experience over the previous eight quarters for remaining loans.
Also considered are changes in the composition of the loan portfolio, the volume
and condition of the loan portfolio, expected cash flows or the observable
market price of the loans or the fair value of the collateral for impaired
loans. Further adjustments may be made relative to the financial condition of
specific borrowers and current economic conditions.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
1999 1998
<S> <C> <C>
Beginning balance $ 56,271 $ 55,223
Provision for loan losses 1,531 3,316
Loan charge-offs (2,617) (4,262)
Loan recoveries 959 931
- ------------------------------------------------------------
Ending balance $ 56,144 $ 55,208
============================================================
Percent to total loans 1.45% 1.40%
============================================================
</TABLE>
The allowance for loan losses was $56,144 at March 31, 1999, representing
1.45% of total loans, compared with $56,271 at December 31, 1998, or 1.45% of
total loans. At March 31, 1998, the allowance for loan losses was $55,208 and
represented 1.40% of total loans. Annualized net charge-offs to average loans
was .17% during the three months ended March 31, 1999, compared to .34% for the
same period of 1998. The provision for loan losses to average loans was .16%
and .34% for the quarters ended March 31, 1999 and 1998, respectively. The
allowance for loan losses to non-performing loans was 153% at March 31, 1999,
compared to 161% at December 31, 1998, and 187% at March 31, 1998.
PAGE 17 OF 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ASSET QUALITY, CONTINUED
- ------------------------
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 nonaccrual status. As indicated in the following
table, the Corporation's non-performing loans as of March 31, 1999, totaled
$36,715, an increase of $1,751 from December 31, 1998, and $7,130 from March 31,
1998. The increase from March 31, 1998, is generally due to management's review
of criticized loans and placing on nonaccrual status in the third quarter of
1998, several smaller loans acquired with the Pinnacle merger. The
non-performing loans to total loans ratio was .95% on March 31, 1999, as
compared to .90% on December 31, 1998, and .75% on March 31, 1998. Total risk
assets equaled 1.28% of loan-related assets at March 31, 1999, compared to 1.19%
at December 31, 1998. In addition to loans classified as risk assets, there
were other loans totaling $21,477 at March 31, 1999, 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>
- ------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
<S> <C> <C> <C>
Nonaccrual loans:
Commercial, agricultural and tax exempt $ 15,652 $ 13,679 $ 18,076
Real estate mortgage 16,992 16,918 8,666
Consumer 3,192 3,426 2,040
----------- -------------- -----------
Total nonaccrual 35,836 34,023 28,782
Restructured loans 879 941 803
----------- -------------- -----------
Total non-performing loans 36,715 34,964 29,585
Foreclosed properties 3,863 3,769 8,499
----------- -------------- -----------
Total non-performing assets 40,578 38,733 38,084
90 days or more past due and accruing:
Commercial, agricultural and tax exempt 3,714 2,446 1,492
Real estate mortgage 4,091 3,814 5,325
Consumer 1,281 1,404 1,364
----------- -------------- -----------
Total 90 days or more past due 9,086 7,664 8,181
----------- -------------- -----------
Total risk assets $ 49,664 $ 46,397 $ 46,265
====================================================================================
Risk assets to loan-related assets 1.28% 1.19% 1.17%
====================================================================================
</TABLE>
Page 18 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INVESTMENT SECURITIES
- ---------------------
Total investment securities represented 41.3% of earning assets at March
31, 1999, compared to 39.1% and 34.2% at December 31, 1998, and March 31, 1998,
respectively. The portfolio has continued to shift toward investments in
mortgage-backed securities which are predominately underwritten to the standards
of, and guaranteed by, government sponsored enterprises. These securities
generally yield 70-100 b.p. more than comparable U.S. Treasury securities but
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. Mortgage-backed securities represented
72.3% of total investment securities at March 31, 1999. The estimated average
life of these securities and the overall portfolio was 4.7 years and 6.0 years,
respectively, at March 31, 1999. Additional state and municipal securities have
also been purchased due to their higher tax equivalent yields. At March 31,
1999, state and municipal securities represented 18.2% of total investment
securities.
DEPOSITS AND OTHER SOURCES OF FUNDS
- -----------------------------------
Total deposits were $4,917,840 at March 31, 1999, compared to $4,958,337
and $4,681,485 at December 31, 1998, and March 31, 1998, respectively. Since
December 31, 1998, interest bearing deposits increased $15,621 and non-interest
bearing deposits decreased $56,118. 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 decreased $46,795 from
the seasonally high fourth quarter but increased $174,291 from first quarter
1998. Non-interest bearing deposits increased $12,811 and $79,946 from fourth
quarter and first quarter 1998 averages, respectively. The increase in
non-interest bearing deposits is the result of a corporate-wide campaign
targeting interest and non-interest bearing checking accounts. Average interest
and non-interest bearing checking accounts have increased $22,653 since the
fourth quarter and $120,453, or 12.1%, since first quarter 1998. Customers'
preference has shifted to money market deposit accounts due to the flat yield
curve and the very competitive pricing offered by the Corporation. Accordingly,
average money market deposit accounts increased $207,320 from first quarter 1998
and savings and certificates of deposit account averages declined $58,162 and
$15,374, respectively.
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 $851,859, $697,960 and $537,547
at March 31, 1999, December 31, 1998, and March 31, 1998, 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 $595,502 at March 31, 1999, compared to $626,759 at
December 31, 1998, and $658,410 at March 31, 1998. Advances from the FHLB
accounted for $582,635 of total long-term debt at March 31, 1999, and continue
to be a flexible and relatively inexpensive source of funds. The Corporation
expects to continue utilizing the FHLB as a core funding source for its
subsidiary bank.
Page 19 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 March 31,
1999, the Corporation had $422,403 in investment securities maturing within one
year. The Corporation additionally has federal funds lines and other borrowing
sources available to it and its subsidiary bank. 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 March 31, 1999, the entire $50,000 of the line of credit remained
available for future use. Effective April 1, 1999, the Corporation chose to
reduce its line of credit to $10,000.
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 March 31, 1999, was $517,629, compared
to $527,046 at December 31, 1998, and $524,635 at March 31, 1998. In order to
maintain its capital position at a desired level, the Corporation maintains a
stock repurchase program whereby 5% of its outstanding shares are repurchased
annually for specific corporate purposes, including but not limited to an annual
stock dividend. During the first three months of 1999, the Corporation
repurchased $19,031 of its common stock under this program.
The Corporation and its bank subsidiary are subject to various regulatory
capital requirements administered by state and federal banking agencies. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its bank subsidiary 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 bank subsidiary to maintain minimum amounts and
ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital
to average assets. Management believes, that as of March 31, 1999, the
Corporation and its bank subsidiary exceeded all regulatory capital adequacy
requirements to which they were subject.
As of March 31, 1999, the most recent notification from regulatory agencies
categorized the bank subsidiary 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 bank subsidiary's
categories. The trust preferred securities, discussed in Note 6 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 regulatory
authority at March 31, 1999:
Page 20 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
- ------------------------------------------
<TABLE>
<CAPTION>
ACTUAL MINIMUM REQUIREMENTS
Amount Ratio Amount Ratio
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Total Capital to risk weighted assets $698,008 15.85% $352,244 8.00%
Tier 1 Capital to risk weighted assets 641,950 14.58 176,122 4.00
Tier 1 Capital to average assets
(leverage ratio) 641,950 9.12 281,613 4.00
</TABLE>
YEAR 2000
- ---------
The Corporation is subject to risks associated with the "Year 2000" issue,
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 manages 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) which follows
guidelines outlined by the Federal Financial Institutions Examination Council
(FFIEC). The FFIEC requires all banks to develop a plan that includes five
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, oversight of the testing of those
systems is the responsibility 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 less critical systems as to each vendor's progress and
testing. A test lab is being used and systems are being tested in a
non-production environment. Certification of Year 2000 compliance for these
systems has been received from all vendors including all those deemed critical.
One critical outsourced system, the human resource/payroll system, that was not
Year 2000 compliant, has been replaced. The renovation, validation and
implementation phases for critical systems was successfully completed during the
first quarter. The review of non-critical systems continues on schedule and is
expected to be completed by June 30, 1999. A
Page 21 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000, CONTINUED
- --------------------
system is deemed validated upon completion of an appropriate test plan,
contingency plan and system testing of the Year 2000 compliant version without
problems.
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 system. Implementation of this equipment and software will
resolve certain Year 2000 issues and will 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 due to
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 addresses a wide variety of issues including: failure of a
system during Year 2000 testing, failure of electrical, telecommunication, or
water systems, failure of a system during the century date change and liquidity
plans. Special considerations have been given to the weekend of the century date
change. The Contingency Plan is intended to be a changing document based on the
ongoing results of the project and is updated on a regular basis.
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 require 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. Upgrades to these systems have
begun and will be completed during the second quarter 1999.
The risks associated with the Year 2000 issue can be grouped into two
categories. The first is the risk that the Corporation will not ready its
systems for the century date change. The second is the risk of disruption of the
Corporation's operations due to an operational failure of a third party. The
first category includes those risks that are largely under the Corporation's
control. As stated above, the Corporation has and continues to take significant
steps to correct any Year 2000 related issues. Management believes the risk of
any internal critical system not being Year 2000 ready is low.
Page 22 of 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000, CONTINUED
- --------------------
The second risk category is largely outside of the Corporation's control.
The Corporation would be most seriously affected if Year 2000 failures of others
caused basic services such as electrical power, telecommunications or government
agencies to be disrupted. Although the preparation of such providers has been
reviewed, there can be no assurance that Year 2000 failures of third parties
will not have a material adverse impact on the Corporation.
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, 1998.
PAGE 23 OF 28
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
On April 21, 1999, the Corporation held its Annual Meeting of Shareholders.
There were 35,206,103 shares outstanding on the March 5, 1999, record date.
The following directors received votes as noted and were elected to terms
to expire in 2002:
Affirmative Withheld
----------- --------
H. Lee Cooper III 29,656,797 244,283
John D. Engelbrecht 29,674,191 226,888
James E. Hutton 29,603,592 297,487
Robert K. Ruxer 29,677,505 223,574
Continuing directors and the dates of the expiration of their term in
office is as follows:
2000 2001
---- ----
James J. Giancola Terrence A. Friedman
Robert L. Koch II Edmund L. Hafer, Jr.
Lawrence J. Kremer Burkley F. McCarthy
Alton C. Wendzel Thomas W. Traylor
Additionally, shareholders voted upon and approved the CNB Bancshares, Inc.
1999 Stock Incentive Plan, which is to provide incentives and rewards for key
employees and non-employee directors of the Corporation and its subsidiaries.
The following represents the results of the approval:
Affirmative Withheld
----------- --------
20,773,245 4,925,915
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 24 OF 28
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 May 10, 1999 by /s/ James J. Giancola
--------------------------- ---------------------------------
James J. Giancola,
President and Chief Executive Officer
Date May 10, 1999 by /s/ Ralph L. Alley
-------------------------- ----------------------------------
Ralph L. Alley,
Senior Vice President and Controller
(Principal Accounting Officer)
Page 25 of 28
EXHIBIT INDEX
Reg. S-K
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
27 Financial Data Schedule 27-28
Page 26 of 28
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