<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 (no fee required) For the quarterly period ended
September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 (no fee required) For the transition period from
________ to ________
Commission File No. 0-25988
CNB, Inc.
-------------------------------
(Name of Small Business Issuer)
FLORIDA 59-2958616
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Post Office Box 3239
201 North Marion Street
Lake City, Florida 32056
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 755-3240
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___
The number of shares of the registrant's common stock outstanding as of October
31, 1998 was 4,856,770 shares, $0.01 par value per share.
The purpose of this amendment is to correct the number of shares of common stock
authorized.
<PAGE>
CNB, INC.
FINANCIAL REPORT ON FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets ..................... 3
Consolidated Statements of Income ............... 4
Consolidated Statements of Shareholders' Equity . 6
Consolidated Statement of Cash Flows ............ 7
Notes to Consolidated Financial Statements ...... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Selected Financial Data ......................... 9
Overview ........................................ 10
Results of Operations ........................... 10
Earning Assets .................................. 14
Funding Sources ................................. 19
Interest Rate Sensitivity / Liquidity ........... 19
Capital Ratios .................................. 23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ...... 24
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CNB, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1998
---------------
ASSETS (in thousands)
<S> <C>
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 10,197
Federal funds sold 35,725
Interest bearing deposits in other banks 5,961
---------------
Total Cash and Cash Equivalents 51,883
Investment securities available for sale 42,717
Investment securities held to maturity 5,597
Loans:
Commercial, Financial & Agricultural 78,643
Real Estate - Mortgage 71,966
Real Estate - Construction 5,801
Installment & Consumer Lines 20,212
---------------
Total Loans, net of unearned discount 176,622
Less: Allowance for Loan Losses (1,602)
---------------
Net Loans 175,020
Premises and equipment, net 10,792
Other assets 4,557
---------------
TOTAL ASSETS $290,566
---------------
---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 31,293
Savings, Time & Demand 179,186
Time, $100,000 & over 38,694
---------------
Total Deposits 249,173
Securities sold under repurchase agreements 7,635
Other liabilities 3,203
---------------
Total Liabilities 260,011
---------------
---------------
SHAREHOLDERS' EQUITY
Preferred stock; $.01 par value; 500,000 shares
authorized; no shares issued or outstanding -
Common stock; $.01 par value; 10,000,000 shares
authorized; 4,856,770 shares issued and outstanding 49
Additional paid-in capital 19,465
Retained earnings 10,594
Unrealized gain on investment securities available for sale, net of taxes 447
---------------
Total Shareholders' Equity 30,555
---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $290,566
---------------
---------------
</TABLE>
3
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND
OTHER COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
----------- -------------
(in thousands, except share data)
<S> <C> <C>
Interest Income
Interest and fees on loans $ 11,711 $ 10,799
Interest on investment securities held to maturity 271 378
Interest on investment securities available for sale 2,253 2,755
Interest on federal funds sold 1,189 437
Interest on interest bearing deposits 242 31
----------- -----------
Total Interest Income 15,666 14,400
Interest Expense
Interest on deposits 6,724 6,101
Interest on notes payable 7 136
Interest on short-term borrowings 261 179
----------- -----------
Total Interest Expense 6,992 6,416
----------- -----------
Net Interest Income 8,674 7,984
Provision for Loan Loss 400 330
----------- -----------
Net Interest Income After Provision for Loan Loss 8,274 7,654
Non-interest Income
Service charges 1,304 1,274
Other fees and charges 410 344
Gain on sale of securities 2 1
----------- -----------
Total Non-Interest Income 1,716 1,619
----------- -----------
Non-interest Expense
Salaries and employee benefits 3,506 2,950
Occupancy and equipment expenses 1,201 1,026
Other operating expenses 2,128 1,872
----------- -----------
Total Non-interest Expense 6,835 5,848
----------- -----------
Income Before Income Taxes 3,155 3,425
Income Taxes 1,088 1,190
----------- -----------
NET INCOME $ 2,067 $ 2,235
----------- -----------
----------- -----------
Other Comprehensive Income, Net of Tax
Unrealized gains on securities:
Unrealized gains arising during the period 192 140
Less: reclassification adjustment for gains (losses)
included in net income (1) 15
----------- -----------
Other Comprehensive Income 191 155
----------- -----------
Comprehensive Income $ 2,258 $ 2,390
----------- -----------
----------- -----------
Earnings Per Share:
Basic earnings per share $ 0.43 $ 0.54
----------- -----------
Average common shares 4,856,770 4,152,656
----------- -----------
Dilutive earnings per share $ 0.42 $ 0.53
----------- -----------
Dilutive average common shares and share equivalents 4,969,978 4,211,864
----------- -----------
----------- -----------
</TABLE>
4
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND
OTHER COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
----------- ------------
(in thousands, except share data)
<S> <C> <C>
Interest Income
Interest and fees on loans $ 4,073 $ 3,711
Interest on investment securities held to maturity 77 114
Interest on investment securities available for sale 677 914
Interest on federal funds sold 469 195
Interest on interest bearing deposits 82 27
----------- -----------
Total Interest Income 5,378 4,961
Interest Expense
Interest on deposits 2,331 2,106
Interest on notes payable -- 40
Interest on short-term borrowings 104 58
----------- -----------
Total Interest Expense 2,435 2,204
----------- -----------
Net Interest Income 2,943 2,757
Provision for Loan Loss 170 70
----------- -----------
Net Interest Income After Provision for Loan Loss 2,773 2,687
Non-interest Income
Service charges 451 442
Other fees and charges 128 123
Gain on sale of securities -- 1
----------- -----------
Total Non-Interest Income 579 566
----------- -----------
Non-interest Expense
Salaries and employee benefits 1,250 983
Occupancy and equipment expenses 407 362
Other operating expenses 724 658
----------- -----------
Total Non-interest Expense 2,381 2,003
----------- -----------
Income Before Income Taxes 971 1,250
Income Taxes 333 436
----------- -----------
NET INCOME $ 638 $ 814
----------- -----------
----------- -----------
Other Comprehensive Income, Net of Tax
Unrealized gains on securities:
Unrealized gains arising during the period 144 149
Less: reclassification adjustment for gains
included in net income -- (1)
----------- -----------
Other Comprehensive Income 144 148
----------- -----------
Comprehensive Income $ 782 $ 962
----------- -----------
----------- -----------
Earnings Per Share:
Basic earnings per share $ 0.13 $ 0.17
----------- -----------
----------- -----------
Average common shares 4,856,770 4,697,320
----------- -----------
----------- -----------
Dilutive earnings per share $ 0.13 $ 0.17
----------- -----------
----------- -----------
Dilutive average common shares and share equivalents 4,969,978 4,756,528
----------- -----------
----------- -----------
</TABLE>
5
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain Total
Common Paid-in Retained Treasury on Investment Shareholders'
Stock Capital Earnings Stock Securities Equity
------- ---------- --------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 39 $ 12,663 $ 6,901 $-- $ 66 $ 19,669
Net Income for Nine Months
Ended September 30, 1997 -- -- 2,235 -- -- 2,235
Cash Dividends $0.10 per share -- -- (426) -- -- (426)
Issuance of 968,960 shares of common
stock @ $7.00 per share, net of
offering costs 10 6,744 -- -- -- 6,754
Treasury Stock Transactions -- (2) -- -- -- (2)
Change in Unrealized Gain on Securities
Available for Sale, net of taxes -- -- -- -- 140 140
-------- -------- -------- ---- -------- --------
BALANCE, SEPTEMBER 30, 1997 $ 49 $ 19,405 $ 8,710 $-- $ 206 $ 28,370
-------- -------- -------- ---- -------- --------
-------- -------- -------- ---- -------- --------
BALANCE, DECEMBER 31, 1997 $ 49 $ 19,465 $ 9,256 $-- $ 255 $ 29,025
Net income for the Nine Months
Ended September 30, 1998 -- -- 2,067 -- -- 2,067
Cash Dividends $0.15 per share -- -- (729) -- -- (729)
Change in Unrealized Gain on Securities
Available for Sale, net of taxes -- -- -- -- 192 192
-------- -------- -------- ---- -------- --------
BALANCE, SEPTEMBER 30, 1998 $ 49 $ 19,465 $ 10,594 $-- $ 447 $ 30,555
-------- -------- -------- ---- -------- --------
-------- -------- -------- ---- -------- --------
</TABLE>
6
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,067 $ 2,235
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 666 602
Provision for loan loss 400 330
Investment securities amortization, net 54 115
Changes in assets and liabilities:
Other Assets (551) (150)
Other Liabilities 949 237
-------- --------
Net Cash Provided By Operating Activities 3,585 3,369
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale (4,163) (10,171)
Proceeds from called securities available for sale 3,600 6,750
Proceeds from maturities of securities available for sale 8,000 8,000
Proceeds from sale of securities available for sale -- --
Principal payments received on mortgage backed securities
available for sale 2,970 1,998
Principal payments received on mortgage backed securities
held to maturity 2,470 1,309
Net increase in loans (17,266) (10,070)
Purchases of premises and equipment, net (1,197) (1,125)
-------- --------
Net Cash Used In Investing Activities (5,586) (3,309)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,729 2,769
Securities sold under repurchase agreements (1,523) 406
Repayment of note payable (1,450) (900)
Cash dividend(s) (729) (426)
Purchase of treasury stock -- (2)
Issuance of common stock -- 6,754
-------- --------
Net Cash Provided By Financing Activities 14,027 8,601
-------- --------
Net Increase in Cash and Cash Equivalents 12,026 8,661
Beginning Balance 39,857 22,880
-------- --------
Cash and Cash Equivalents at End of Period $ 51,883 $ 31,541
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 6,987 $ 6,180
-------- --------
-------- --------
Taxes Paid $ 722 $ 1,355
-------- --------
-------- --------
</TABLE>
7
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
Note 1. Consolidation
The consolidated financial statements include the accounts of CNB, Inc. and its
subsidiary bank, CNB National Bank. All significant intercompany accounts and
transactions have been eliminated.
Note 2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB which do not require all information and
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. For further information refer to the consolidated financial
statements and footnotes, thereto, included in the Company's annual report on
Form 10-KSB for the year-ended December 31, 1997. In the opinion of management,
such financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the results for the
interim periods presented. Operating results for the nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
Note 3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standard ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 replaces the presentation of primary and fully diluted earnings per
share with a presentation of basic and diluted earnings per share. Basic
earnings per share is calculated based on weighted average number of shares of
common stock outstanding. Diluted earnings per share is calculated based on the
weighted average number of shares of common stock outstanding and common stock
equivalents, consisting of outstanding stock options. Common stock equivalents
are determined using the treasury method for diluted shares outstanding. The
difference between diluted and basic shares outstanding is common stock
equivalents from stock options outstanding in the periods ended September 30,
1998 and 1997.
Note 4. Comprehensive Income
On January 1, 1998, the Company adopted Statements of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
provides new accounting and reporting standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of this standard did not have a material
impact on reported results of operations of the Company. Total comprehensive
income is defined as the total of net income and all other changes in equity.
Note 5. New Accounting Pronouncement
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards for derivative instruments (including certain derivative
instruments imbedded in other contracts). The statement is effective for fiscal
year 2000. The financial impact of the adoption of this statement has not been
determined. However, the affect of the adoption of the statement is not expected
to be material.
Note 6. 2-for-1 Stock Split
On July 15, 1998, the Company declared a 2-for-1 common stock split for
shareholders of record on August 10, 1998 to be effective on August 17, 1998.
The accompanying financial statements have been restated to reflect this stock
split.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. The following tables and discussion set forth certain
selected financial information and should be read in conjunction with the
consolidated financial statements (unaudited) of the Company and the Bank
included in "Item 1. Financial Statements" above. The Company has no foreign
operations; accordingly, there are no assets or liabilities attributable to
foreign operations.
Selected Financial Data
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997 Change%
------------ ------------- -------
Dollars in thousands, except per share information.
<S> <C> <C> <C>
SUMMARY OF OPERATIONS:
Total Interest Income $ 15,666 $ 14,400 9 %
Total Interest Expense (6,992) (6,416) 9
------------ ------------
Net Interest Income 8,674 7,984 9
Loan Loss Provision (400) (330) 21
------------ ------------
Net Interest Income After
Provision for Loan Losses 8,274 7,654 8
Non-Interest Income 1,716 1,619 6
Non-Interest Expense (6,835) (5,848) 17
------------ ------------
Income Before Taxes 3,155 3,425 (8)
Income Taxes (1,088) (1,190) (9)
------------ ------------
Net Income $ 2,067 $ 2,235 (8)%
------------ ------------
------------ ------------
PER COMMON SHARE:
Net Income Per Common Share $ 0.43 $ 0.54 (20)%
Dilutive Earnings Per Common Share 0.42 0.53 (21)
Book Value 6.29 5.86 7
Dividends 0.15 0.10 50
Period End Shares Outstanding 4,856,770 4,844,770 --
Weighted Average Shares Outstanding 4,856,770 4,152,656 17
Dilutive Weighted Average Shares Outstanding 4,969,978 4,211,864 18
KEY RATIOS:
Return on Average Assets 0.97% 1.16% (16)%
Return on Average Shareholders' Equity 9.27 13.30 (30)
Dividend Payout-computed on a per share basis 34.88 18.52 88
Overhead Ratio 68.42 63.06 8
Total Risk-Based Capital Ratio 17.51 18.24 (4)
Average Shareholders' Equity to Assets 10.51 8.70 21
Tier 1 Leverage 9.92 10.13 (2)
FINANCIAL CONDITION AT PERIOD-END:
Assets $ 290,566 $ 266,158 9 %
Total Loans, net of unearned discount 176,622 158,651 11
Total Deposits 249,173 229,593 9
Common Shareholders' Equity 30,555 28,370 8
</TABLE>
9
<PAGE>
OVERVIEW
The information for the nine months ended September 30, 1998 and 1997
is derived in part from the Company's unaudited financial statements and
includes, in the opinion of management, all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the data for such
periods. Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for any other interim
period or for the entire year ending December 31, 1998. This information does
not purport to be complete and should be read in conjunction with the Company's
Financial Statements appearing elsewhere in this document.
On September 30, 1998 the Company had total assets of $290.6 million,
total loans of $176.6 million, net of unearned discount, total deposits of
$249.2 million and total shareholders' equity of $30.6 million , representing
five year compound annual growth rates of 27%, 24%, 26% and 29%, respectively.
On July 15, 1998, the Company declared a 2-for-1 stock split for shareholders
of record to be effective August 17, 1998. The Company's financial statements
and other information have been restated to reflect the 2-for-1 stock split.
The Company's net income for the nine months ended September 30, 1998
was $2.1 million or $0.43 per share, compared to net income of $2.2 million or
$0.54 per share for September 30, 1997. Per share income was negatively impacted
in 1998 by the issuance of new shares under the Rights Offering on July 15,
1997. Total profitability for September 30, 1998 compared to September 30, 1997
was negatively impacted by an increase in non-interest expense of $987,000 or
16.9%. The increase in non-interest expense was attributable primarily to the
development of staffing and infrastructure to support the Company's expansion
plans. The Company earned $638,000 for the three months ended September 30,
1998, a decrease from $814,000 for the comparable period in 1997. Basic
earnings per share decreased from $0.17 to $0.13 per share for the same
period, consistent with the factors mentioned above.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the primary source of revenue for the Bank, was
$8.7 million for the nine month period ending September 30, 1998, an increase of
$690,000, or 8.6% from last year. This increase was primarily a result of growth
in interest and fees on loans. Average earning assets increased by $23.7
million, or 10.0%, to $259.4 million in 1998 from $235.7 million in 1997, due to
increases in loans and fed funds sold. Interest expense was $7.0 million for the
nine month period of 1998, compared to $6.4 million for the same period in 1997,
with growth in time deposits being the main contributing factor for this
increase. The Company's net interest margin decreased to 4.47% as of September
30, 1998, from 4.53% as of September 30, 1997. The Company's interest rate
spread decreased to 3.79% at September 30, 1998, from 3.94% at September 30,
1997, or fifteen basis points, reflecting the competitive interest rate
environment for loans and deposits. Net interest income increased for the three
months ended, September 30, 1998 by $186,000, or 6.7% from $2.7 million to $2.9
million, consistent with the factors mentioned previously.
10
<PAGE>
<TABLE>
<CAPTION>
Table 1: Average Balances - Yields and Rates
September 30, 1998 September 30, 1997
------------------------------------ ----------------------------------
Interest Interest
Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate
--------- --------- ------- -------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal Funds Sold $ 29,407 $ 1,189 5.41% $ 11,056 $ 437 5.28%
Securities Available for Sale 49,286 2,253 6.11 60,572 2,755 6.08
Securities Held to Maturity 7,108 271 5.10 9,403 378 5.37
Loans, net unearned (1) 167,760 11,711 9.33 154,006 10,799 9.38
Interest Bearing Deposits 5,826 242 5.55 683 31 6.06
--------- --------- ---- ---------- --------- ----
TOTAL EARNING ASSETS 259,387 15,666 8.07 235,720 14,400 8.17
All Other Assets 24,159 22,515
-------- --------
TOTAL ASSETS $ 283,546 $ 258,235
======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
NOW & Money Markets $ 67,931 $ 1,276 2.51% $ 62,359 $ 1,161 2.49%
Savings 16,246 237 1.95 15,107 221 1.96
Time Deposits 127,272 5,211 5.47 118,484 4,719 5.33
Short Term Borrowings 6,844 261 5.10 4,743 179 5.05
Notes Payable & Debentures 113 7 8.00 2,250 136 8.08
--------- --------- ---- ---------- --------- ----
TOTAL INTEREST BEARING
LIABILITIES 218,406 6,992 4.28 202,943 6,416 4.23
Demand Deposits 32,453 30,459
Other Liabilities 2,881 2,360
Shareholders' Equity 29,806 22,473
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 283,546 $ 258,235
======= =======
---- ----
INTEREST SPREAD (2) 3.79% 3.94%
==== ====
-------- --------
NET INTEREST INCOME $ 8,674 $ 7,984
======== ========
NET INTEREST MARGIN (3) 4.47% 4.53%
==== ====
</TABLE>
- -------------------
(1) Interest income on loans includes fees on loans of approximately $410,000
and $402,000 in 1998 and 1997 respectively.
(2) Represents the average rate earned minus average rate paid.
(3) Represents net interest income divided by total earning assets.
11
<PAGE>
Table 1a: Analysis of Changes in Interest Income and Expense
<TABLE>
<CAPTION>
NET CHANGE SEPTEMBER 30, NET CHANGE SEPTEMBER 30,
1997-1998 ATTRIBUTABLE TO: 1996-1997 ATTRIBUTABLE TO:
------------------------------------- ------------------------------
Net Net
Volume (1) Rate (2) Change Volume (1) Rate (2) Change
---------- -------- ------- ---------- -------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Federal Funds Sold $ 725 $ 27 $ 752 $ 57 $ 12 $ 69
Securities Available for Sale (513) 11 (502) 956 59 1,015
Securities Held to Maturity (93) (14) (107) (133) (28) (161)
Loans 971 (59) 912 3,156 (167) 2,989
Interest Bearing Deposits 233 (22) 211 12 2 14
------- ------ ------- ------- ------- -------
Total 1,323 (57) 1,266 4,048 (122) 3,926
------- ------ ------- ------- ------- -------
INTEREST EXPENSE:
Deposits:
NOW & Money Markets 104 11 115 308 (80) 228
Savings 17 (1) 16 34 (15) 19
Time Deposits 355 137 492 1,221 128 1,349
Short Term Borrowings 80 2 82 179 -- 179
Notes Payable & Debentures (129) -- (129) 71 (6) 65
------- ------ ------- ------- ------- -------
Total 427 149 576 1,813 27 1,840
------- ------ ------- ------- ------- -------
Net Interest Income $ 896 $ (206) $ 690 $ 2,235 $ (149) $ 2,086
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
</TABLE>
- -----------------
(1) The volume variance reflects the change in the average balance outstanding
multiplied by the actual average rate during the prior period.
(2) The rate variance reflects the change in the actual average rate multiplied
by the average balance outstanding during the prior period. Changes which are
not solely due to volume or solely due to rate changes have been attributed to
rate changes.
Provision for Loan Loss
Management's policy is to maintain the allowance for loan losses at a
level sufficient to absorb inherent losses in the loan portfolio. The allowance
is increased by the provision for loan losses which is a charge to current
period earnings and net of recoveries on prior period loan charge-offs. The
allowance is decreased by net charge-offs. In determining the adequacy of the
reserve for loan losses, management considers the Company's historical loan loss
experience and the general economic environment, conditions of individual
borrowers, those levels maintained by other peer banks, as well as the overall
portfolio composition. As these factors change, the level of loan loss provision
changes. The provision for loan losses increased $70,000, or 21.2%, to $400,000
during the period ending September 30, 1998, as compared to $330,000 for the
comparable period in 1997. For the three months ended September 30, 1998, the
provision for loan losses increased $100,000 or 142.9% to $170,000 as compared
to $70,000 for the same period in 1997. These increases are due mainly to the
Company's budgeted increase for the Allowance for Loan Losses.
Non-Interest Income
Non-interest income for the nine months ended September 30, 1998, was
$1.7 million, a modest increase of $97,000, or 6.0%, as compared to the same
period in 1997. An increase in other fees and charges, which include credit life
insurance fees and mortgage servicing fees collected from mortgage loans sold to
secondary markets, were the main contributing factors. Non-interest income for
the three months ended September 30, 1998, was $579,000, an increase of $13,000,
or 2.3%, as compared to the same period in 1997. The same factors as stated for
the nine month period contributed to this increase.
12
<PAGE>
Non-Interest Expense
Non-interest expense increased $987,000 for the nine months ended
September 30, 1998, or 16.8%, to $6.8 million, compared to $5.8 million for the
same period in 1997. Salaries and employee benefits increased 18.8% to $3.5
million, compared to $3.0 million in 1997. The increase was due mainly to the
implementation of the Company's business plan to support an expansion into Duval
(Jacksonville) and Alachua (Gainesville) Counties. The plan involved hiring a
Bank President, three Division Presidents and several other key positions during
the fourth quarter of 1997 and first half of 1998. Full time equivalent
employees were up 7.1% to 151 at September 30, 1998, compared to 141 at
September 30, 1997. As of September 30, 1998, occupancy and equipment expenses
have increased $175,000, or 17.1%, to $1.2 million, compared to the same date in
1997. The increase was mainly due to the purchasing of maintenance contracts
associated with the customer statement imaging equipment and expenses related to
the opening of the West 90 Office. Other operating expenses increased $256,000,
or 13.7%, in 1998 compared to 1997. One of the main contributing expenses is an
increase in telephone expense, which resulted when the Bank installed a new toll
free telephone banking system in April 1997 to allow its customers access to
their accounts 24 hours a day, seven days a week. The Company anticipates that a
proportionate decrease in personnel costs should directly offset the cost of
this system in future periods. Table 2, below, presents a comparison of major
categories of other operating expenses for the nine months ended September 30,
1998 and 1997.
Non-interest expense for the three month period ended September 30,
1998 increased by $378,000, or 18.9%, to $2.4 million, as compared to $2.0
million for the comparable period in 1997. The increase was primarily a result
of the factors mentioned above.
Table 2: Other Operating Expenses
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Data Processing $ 404 $ 387
Postage and Delivery 275 249
Other 249 160
Advertising and Promotion 239 218
Telephone 196 128
Supplies 178 187
Legal and Professional 155 118
Amortization of Intangible Assets 143 151
Regulatory Fees 100 86
Loan Expenses 99 112
Administrative 90 76
------ ------
Total Other Operating Expenses $2,128 $1,872
------ ------
------ ------
</TABLE>
Income Taxes
The Company's income tax expenses in interim reporting periods is
determined by estimating the combined federal and state effective tax rate for
the year and applying the resultant rate to interim pre-tax income. The
effective tax rate for the nine months ended September 30, 1998, was 34.5%,
compared to 34.7% for the same period in 1997. The income tax provision was $1.1
million for the nine months ended September 30, 1998, as compared to $1.2
million for the same period in 1997.
13
<PAGE>
EARNING ASSETS
Loans
Lending is the most important component of the Company's net interest
income and is the key to profitability. The loan portfolio is the largest
element of earning assets, and it therefore generates the largest portion of
revenues. The absolute volume of loans and the volume of loans as a percentage
of earning assets is an important determinant of net interest margin as loans
are expected to produce higher yields than securities and other earning assets
(assuming loan losses are not excessive). Average loans during the nine-month
period ending September 30, 1998, were $167.8 million, or 64.7%, of earning
assets as compared to $154.0 million, or 65.3%, of earning assets for the same
period in 1997. This represented an average loan to average deposit ratio of
68.8% and 68.0% for September 30, 1998 and 1997, respectively. This growth is
reflective of the Company's business plan to increase its loan to deposit ratio.
As of September 30, 1998, the Company had total loans of $176.6 million, net of
unearned discount, as compared to $158.7 million at September 30,1997, an
increase of $17.9 million, or 11.3%.
Table 3: Loan Portfolio Composition
<TABLE>
<CAPTION>
September 30,
1998 1997
--------- --------
(thousands)
<S> <C> <C>
Types of Loans
Commercial, Financial and Agricultural $ 78,643 $ 69,457
Real Estate - Construction 5,801 3,722
Real Estate - Mortgage 71,966 66,983
Installment and Consumer Lines 20,212 18,489
-------- --------
Total Loans, Net of Unearned Discount 176,622 158,651
Less: Allowance for Loan Losses 1,602 1,483
-------- --------
Net Loans $175,020 $157,168
-------- --------
-------- --------
</TABLE>
The following table sets forth the maturity distribution for selected
components of the Company's loan portfolio on September 30, 1998. Demand loans
and overdrafts are reported as due in one year or less, and loan maturity is
based upon scheduled principal payments.
Table 4: Maturity Schedule of Selected Loans
<TABLE>
<CAPTION>
September 30, 1998
0-12 1-5 Over 5
Months Years Years Total
--------- ------- -------- -----
(thousands)
<S> <C> <C> <C> <C>
All Loans Other Than Construction $ 15,956 $ 67,976 $ 86,889 $ 170,821
Real Estate - Construction 5,801 -- -- 5,801
--------- --------- --------- ----------
Total $ 21,757 $ 67,976 $ 86,889 $ 176,622
--------- --------- --------- ----------
--------- --------- --------- ----------
Fixed Interest Rate $ 10,992 $ 48,181 $ 27,813 $ 86,986
Variable Interest Rate $ 10,765 $ 19,795 $ 59,076 $ 89,636
</TABLE>
14
<PAGE>
Loan Quality. The allowance for loan losses on September 30, 1998, was 0.91%
of total loans, compared to 0.93% one year earlier. Table 5: "Allocation of
Allowance for Loan Losses", set forth below, indicates the specific reserves
allocated by loan type.
Table 5: Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
September 30,
1998 1997
----------------------- ------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 947 45% $ 906 44%
Real Estate - Construction 7 3% 8 2%
Real Estate - Mortgage 135 41% 164 42%
Consumer 513 11% 405 12%
Unallocated -- -- -- --
------ ---- ------- ----
Total $1,602 100% $ 1,483 100%
------ ---- ------- ----
------ ---- ------- ----
</TABLE>
Total non-performing assets on September 30, 1998 increased $376,000 or
26.7% to $1.8 million compared to $1.4 million on the same date in 1997.
Non-performing loans, plus other real estate owned, as a percentage of total
assets at September 30, 1998 and 1997 was 0.61% and 0.53%, respectively. The
increase in non-performing assets is mainly attributable to one loan
relationship acquired from the Riherd acquisition totalling $414,000, which is
in process of collection. Anticipated losses applicable to these loans have been
provided for in the allowance for loan losses on September 30, 1998.
Table 6: Non-Performing Assets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997
----- ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Non-Accrual Loans $ 849 $1,256 $1,045
Past Due Loans 90 Days or
More and Still Accruing 253 78 158
Other Real Estate Owned &
Repossessions 684 76 320
------ ------ ------
Total Non-Performing Assets $1,786 $1,410 $1,523
------ ------ ------
------ ------ ------
Percent of Total Assets 0.61% 0.53% 0.56%
</TABLE>
The determination of the reserve level rests upon management's judgment
about factors affecting loan quality and assumptions about the economy.
Management considers the period-end allowance appropriate and adequate to cover
possible losses in the loan portfolio; however, management's judgment is based
upon a number of assumptions about future events, which are believed to be
reasonable, but which may or may not prove to be valid. Thus, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
loan losses or that additional increases
15
<PAGE>
in the allowance for loan losses will not be required. Table 7: "Activity in
Allowance for Loan Losses", below, indicates activity in the allowance for loan
losses for the first nine month period of 1998 as compared to 1997.
Table 7: Activity in Allowance for Loan Losses
<TABLE>
<CAPTION>
September 30,
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Allowance for loan loss balance applicable to:
Balance at Beginning of Year $ 1,495 $ 1,396
Loans Charged-Off:
Commercial, Financial and Agricultural 121 115
Real Estate, Construction -- --
Real Estate, Mortgage 3 --
Consumer 237 171
-------- --------
Total Loans Charged-Off 361 286
Recoveries on Loans Previously Charged-Off:
Commercial, Financial and Agricultural 33 11
Real Estate, Construction -- --
Real Estate, Mortgage 7 --
Consumer 28 32
-------- --------
Total Loan Recoveries 68 43
-------- --------
Net Loans Charged-Off 293 243
-------- --------
Provision for Loan Losses Charged to Expense 400 330
-------- --------
Ending Balance $ 1,602 $ 1,483
-------- --------
-------- --------
Total Loans Outstanding $176,622 $158,651
Average Loans Outstanding $167,760 $154,006
Allowance for Loan Losses to Loans Outstanding 0.91% 0.93%
Net Charge-Offs to Average Loans Outstanding 0.23% 0.21%
</TABLE>
Securities
When the Company's liquidity position exceeds expected loan demand,
other investments are considered by management as a secondary earnings
alternative. Typically, management remains short-term (under 5 years) in its
decision to invest in certain securities and always strives to ensure a portion
of its investment portfolio to be maturing in the next quarter. As these
investments mature, they will be used to meet cash needs or will be reinvested
to maintain a desired liquidity position. Most of the investment portfolio is
designated as available for sale to provide the company flexibility and in case
an immediate need for liquidity arises.
The following tables set forth the maturity distribution and the
weighted average yields of the Company's investment portfolio by those
securities held to maturity and available for sale.
16
<PAGE>
Table 8: Maturity Distribution of Investment Securities (1)
September 30,1998
<TABLE>
<CAPTION>
Thousands Held to Maturity Available for Sale
- --------- ------------------------------ ---------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury:
One Year or Less $ -- $ -- $ 8,003 $ 8,053
Over One Through Five Years -- -- 12,460 12,881
------------ ------------ ------------ ------------
Total U.S. Treasury -- -- 20,463 20,934
U.S. Government Agencies
and Corporations:
One Year or Less -- -- 9,847 9,862
Over One Through Five Years -- -- 3,639 3,663
------------ ------------ ------------ ------------
Total U.S. Government Agencies -- -- 13,486 13,525
and Corporations
Obligations of State and Political
Subdivisions:
Over One Through Five Years -- -- 873 897
Over Five Through Ten Years -- -- 100 105
Over Ten Years -- -- 608 654
------------ ------------ ------------ ------------
Total Obligations of State and -- -- 1,581 1,656
Political Subdivisions
Mortgage-Backed Securities (2):
One Year or Less 2,289 2,289 44 43
Over One Through Five Years 3,308 3,299 -- --
Over Five Through Ten Years -- -- 1,919 1,926
Over Ten Years -- -- 3,068 3,108
------------ ------------ ------------ ------------
Total Mortgage-Backed Securities 5,597 5,588 5,031 5,077
Other Securities:
Over Ten Years (3) -- -- 1,443 1,525
------------ ------------ ------------ ------------
Total Other Securities -- -- 1,443 1,525
------------ ------------ ------------ ------------
Total Securities $ 5,597 $ 5,588 $ 42,004 $ 42,717
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- ------------------
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Represents Interest-bearing deposits in other banks.
(3) Represents investment in Federal Reserve Bank and Federal Home Loan Bank
stock and other marketable equity securities.
Table 9: Weighted Average Yield by Range of Maturities
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
One Year or Less 5.67% 5.49%
Over One through Five Years 6.17% 6.02%
Over Five through Ten Years 5.94% 6.78%
Over Ten Years (1) 6.22% 6.39%
</TABLE>
- ------------------
(1) Represents adjustable rate mortgage-backed securities which are
repriceable within one year
17
<PAGE>
Other Earning Assets
Temporary investment needs are created in the day-to-day liquidity
movement of the Bank and are satisfied by selling excess funds overnight (Fed
Funds Sold) to larger, well capitalized banking institutions. If these funds
become excessive, management determines what portion, if any, of the liquidity
may be rolled into longer term investments as securities.
FUNDING SOURCES
Deposits
The Bank does not rely on purchased or brokered deposits as a source of
funds. Instead, competing for deposits within its market area serves as the
Bank's fundamental tool in providing a source of funds to be invested primarily
in loans. The following table sets forth certain deposit categories for the
periods ended September 30, 1998 and 1997.
Table 10: Total Deposits
<TABLE>
<CAPTION>
September 30,
1998 1997
----- -----
(thousands)
<S> <C> <C>
Non-Interest Bearing:
Demand Checking $ 31,293 $ 31,152
Interest Bearing:
NOW Checking 41,862 39,121
Money Market Checking 26,363 23,092
Savings 16,368 14,360
Certificates of Deposit 133,287 121,868
-------- --------
Total Deposits $249,173 $229,593
-------- --------
-------- --------
</TABLE>
Note Payable
The Company has available lines of credit with certain financial
institutions totaling $4.0 million. The amount outstanding as of September 30,
1998 was $0.
Repurchase Agreements
The Bank has entered into repurchase agreements with several customers
under which the Bank pledges investment securities owned and under its control
as collateral against the one-day agreements. The daily average balance of these
agreements during 1998 and 1997 was approximately $6.8 million and $4.7 million,
respectively. Interest expense in 1998 and 1997 was $261,000 and $179,000,
respectively, resulting in an average rate paid of 5.10% and 5.05% for the nine
month period ended September 30, 1998 and 1997, respectively.
Interest Rate Sensitivity
Interest rate sensitivity refers to the responsiveness of
interest-earning assets and interest-bearing liabilities to changes in market
interest rates. The rate sensitive position, or gap, is the difference in the
volume of rate-sensitive assets and liabilities, at a given time interval,
including both floating rate and instruments which are approaching maturity. The
measurement of the Company's interest rate sensitivity, or gap, is one of the
principal techniques used in asset and liability management. Management
generally attempts to maintain a balance between rate-sensitive assets and
liabilities as the exposure period is lengthened to minimize the overall
interest rate risks to the Company. In the future, the Company will attempt to
maintain, with respect to management's expectations of interest rate changes in
the immediate twelve months, a cumulative gap position within plus or minus 20%
of total assets.
18
<PAGE>
The asset mix of the balance sheet is continually evaluated in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity.
The Company's gap and liquidity positions are formally reviewed
quarterly by management to determine whether or not changes in policies and
procedures are necessary to achieve financial goals. Included in the review is
an internal analysis of the possible impact on net interest income due to market
rate changes of plus and minus 1%. In the rate sensitivity analysis, current
average rates within the repricing periods of affected balance sheet categories
are adjusted to an historical percentage of market change according to each rate
shock scenario. The adjusted rates are then substituted in interest computations
and compared to actual results. The Company will continue to search for tools
that will enhance their process of monitoring interest rate risk.
In Table 11, "Rate Sensitivity Analysis", rate sensitive assets and
liabilities are shown by maturity, separating fixed and variable interest
rates. The estimated fair value of each instrument category is also shown in
the table. While these estimates of fair value are based on management's
judgment of the most appropriate factors, there is no assurance that, were
the Company to have disposed of such instruments at September 30,1998, the
estimated fair value would have been achieved at that date, since market
values may differ depending on various circumstances. The estimated fair
values at September 30, 1998 should not necessarily be considered to apply at
subsequent dates.
19
<PAGE>
Table 11: Rate Sensitivity Analysis
September 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Fair
1 Year 2 Years 3 Years 4 Years 5 Years Beyond TOTAL Value
------ ------- ------- ------- ------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans
Fixed Rate Loans $ 10,992 $ 8,688 $ 11,253 $ 12,897 $ 15,343 $ 27,813 $ 86,986 $ 87,354
Average Interest Rate 9.02% 10.34% 9.37% 9.17% 8.85% 8.32% 8.97%
Variable Rate Loans 10,765 5,194 6,958 4,177 3,466 59,076 89,636 89,636
Average Interest Rate 9.55% 10.12% 8.53% 9.19% 8.73% 8.50% 8.76%
Investment Securities(1)
Fixed Rate Investments 20,183 5,077 11,505 3,090 177 3,089 43,121 43,700
Average Interest Rate 5.68% 6.01% 6.05% 6.81% 7.10% 5.82% 5.91%
Variable Rate Investment - - - - - 3,037 3,037 3,080
Average Interest Rate 6.40% 6.40%
Federal Funds Sold 35,725 - - - - - 35,725 35,725
Average Interest Rate 5.34% 5.34%
Other Earning Assets(2) 7,404 - - - - - 7,404 7,404
Average Interest Rate 5.61% 5.61%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Interest-Earning
Assets $ 85,069 $ 18,959 $ 29,716 $ 20,164 $ 18,986 $ 93,015 $ 265,909 $ 266,899
Average Interest Rate 6.45% 9.12% 7.89% 8.81% 8.81% 8.29% 7.79%
========= ========= ========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
NOW $ 12,558 $ - $ - $ - $ - $ 29,304 $ 41,862 $ 41,862
Average Interest Rate 1.63% 1.63% 1.63%
Money Market 24,000 - - - - 2,363 26,363 26,363
Average Interest Rate 3.87% 1.74% 3.68%
Savings 4,910 - - - - 11,458 16,368 16,368
Average Interest Rate 1.91% 1.91% 1.91%
CD's $100,000 and Over 28,253 8,133 1,178 1,008 122 - 38,694 38,560
Average Interest Rate 5.75% 6.30% 6.04% 5.99% 6.50% 5.88%
CD's Under $100,000 75,921 11,012 4,066 3,195 376 23 94,593 94,387
Average Interest Rate 5.18% 5.62% 5.77% 5.72% 5.88% 6.10% 5.28%
Securities Sold Under
Repurchase Agreements 7,635 - - - - - 7,635 7,635
Average Interest Rate 5.10% 5.10%
Notes Payable - - - - - - - -
Average Interest Rate
--------- --------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing
Liabilities $ 153,277 $ 19,145 $ 5,244 $ 4,203 $ 498 $ 43,148 $ 225,515 $ 225,175
Average Interest Rate 4.68% 5.91% 5.83% 5.78% 6.03% 1.71% 4.27%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for unrealized gains of $713,000.
(2) Represents interest bearing deposits with Banks, FRB Stock, Federal Home
Loan Bank Stock and other marketable equity securities.
20
<PAGE>
Liquidity
Liquidity represents the ability to provide steady sources of funds
for loan commitments and investment activities, as well as to provide
sufficient funds to cover deposit withdrawals and payment of debt and
operating obligations. These funds can be obtained by converting assets to
cash or by attracting new deposits. Average liquid assets (cash and amounts
due from banks, interest bearing deposits in other banks, federal funds sold
and securities available for sale) totaled $94.6 million and represented
38.8% of average total deposits during the first nine months of 1998,
compared to $81.7 million and 36.1% for the same period in 1997. Average
loans were 68.8% and 68.0% of average deposits for the nine month period
ended September 30, 1998 and 1997, respectively. As noted in Table 3: "Loan
Portfolio Composition", approximately $156.4 million, or 88.6%, of the loan
portfolio consisted of commercial loans, real estate mortgage loans and real
estate construction loans. Approximately 12.3% of the portfolio matures
within one year.
Core deposits, which management defines as all deposits other than
time deposits in excess of $100,000, were 84.5% of total deposits at the end
of the first nine months of 1998 and 86.4% in the comparable period in 1997.
The Bank closely monitors its reliance on time deposits in excess of
$100,000, which are generally considered less stable and less reliable than
core deposits. Table 12, below, sets forth the amounts of time deposits with
balances of $100,000 or more that mature within indicated periods. The Bank
does not nor has it ever solicited brokered deposits.
Table 12: Maturity of Time Deposits of $100,000 or More
September 30, 1998
<TABLE>
<CAPTION>
Amount
--------------
(in thousands)
<S> <C>
Three Months or Less $ 8,044
Three Through Six Months 6,846
Six Through Twelve Months 13,363
Over Twelve Months 10,441
---------
Total $ 38,694
========
</TABLE>
Capital Resources
The OCC regulates risk based capital guidelines for national banks.
These guidelines are intended to provide an additional measure of a bank's
capital adequacy by assigning weighted levels of risk to asset categories.
Banks are also required to systematically hold capital against such "off
balance sheet" activities as loans sold with recourse, loan commitments,
guarantees and standby letters of credit. These guidelines are intended to
strengthen the quality of capital by increasing the emphasis on common equity
and restricting the amount of loss reserves and other forms of equity such as
preferred stock that may be included in capital.
Under the terms of the guidelines, banks must meet minimum capital
adequacy based upon both total assets and risk adjusted assets. All banks are
required to maintain a minimum ratio of total capital to risk-weighted assets
of 8% and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%.
Adherence to these guidelines has not had an
21
<PAGE>
adverse impact on the Company or the Bank. Selected capital ratios at
September 30, 1998 compared to 1997 are as follows:
Table 13: Capital Ratios
<TABLE>
<CAPTION>
September 30, Well Capitalized Regulatory
1998 1997 Requirements Minimums
---- ---- ---------------- ----------
<S> <C> <C> <C> <C>
Risk Based Capital Ratios:
Tier 1 Capital Ratio 16.6% 17.3% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 17.5% 18.2% 10.0% 8.0%
Tier 1 Leverage Ratio 9.9% 10.1% 5.0% 4.0%
</TABLE>
Year 2000 Compliance
The Company is currently evaluating, upgrading as applicable, and
testing all hardware, software, networks, ATMs and other processing
platforms. The Company's local area network has been evaluated and is Year
2000 compliant. The individual personal computers throughout the organization
have been tested and the non-compliant computers have been tagged for
replacement, the total expense of which is expected to be approximately
$100,000. The Company will upgrade the current software versions of the
spreadsheet and word processing programs it uses for internal purposes to the
Year 2000 compliant versions after all the personal computer hardware
upgrades have been completed. The software upgrade should cost approximately
$15,000. The environmental systems, phone systems and elevators of the
Company have been evaluated and the relevant vendors have been contacted.
The Company expects to have substantially all of the Year 2000
system and application changes completed by the end of the first quarter of
1999. During 1999 additional testing and re-testing will be performed, and
every effort will be made to ensure the conversion from 1999 to the year 2000
is uneventful. However, there can be no assurance that all necessary
modifications will be identified and corrected or that unforeseen
difficulties or costs will not arise. In addition, there can be no assurance
that the systems of the Company or other companies on which the Company's
systems rely will be modified on a timely basis, or that the failure by
another company to properly modify its systems will not negatively impact the
Company's systems or operations.
The vast majority of the Company's processing needs are outsourced
to two outside vendors and the Company is monitoring their Year 2000 progress
closely. The Company will participate during the fourth quarter of 1998 with
on-site testings of the vendors' systems. The Comptroller also has been
reviewing the efforts of our vendors and thus far has been satisfied.
The Company has contingency plans in place for mission critical
systems in the event of unforeseen difficulties to minimize any disruptions.
Personnel of the Company have been trained and advised to operate on a manual
basis, with all items going to the Company's operations center for
processing. The operations center will operate on a generator that should
allow continued processing and service to the Company's customers.
Year 2000 issues also may adversely impact the businesses of the
Company's customers. The Company has in effect a loan policy pursuant to
which it reviews all present and potential borrowers with loan portfolios
exceeding $500,000 for Year 2000 preparation. The Bank's loan documentation
for new, complex commercial loans, including loans over $250,000, contain
loan agreements with Year 2000 representations and warranties.
At present, it is not possible to give an accurate summation of the
total expenses that the Company will incur, although, the costs are not
expected to have a material impact on the long term results of the operations
or financial condition of the Company. Expenses incurred in the upgrade and
testing of the new hardware and software for the vendor's data processing
system is the outside vendor's responsibility. Non-interest expenses include
the costs of preparing computer systems and applications for the Year 2000.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - There are no material pending legal
proceedings to which the Company or any of its subsidiaries is
a party or of which any of their property is the subject.
Item 2. Changes in Securities -
(a) Not applicable.
(b) Not applicable.
Item 3. Defaults Upon Senior Securities - Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders -
Not applicable
Item 5. Other Information - Not applicable.
Item 6. Exhibits and Reports on Form 8-K -
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K - A Form 8-K was filed by the registrant
on August 11, 1998 to report a two-for-one stock split for all
holders of shares of common stock. The record date is August
10, 1998.
23
<PAGE>
SIGNATURE
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, Inc.
----------------------------------
(Registrant)
By: /s/ K. C. Trowell
---------------------------------
K. C. Trowell
President, Principal Executive
Officer, and Chief Financial
Officer
Date: November 16, 1998
24
