<PAGE>
[LOGO]
1,250,000 SHARES OF COMMON STOCK
THIS IS A PUBLIC OFFERING OF OUR COMMON STOCK. THERE IS NO ESTABLISHED
PUBLIC TRADING MARKET FOR OUR COMMON STOCK. THE PUBLIC OFFERING PRICE PER SHARE
FOR OUR COMMON STOCK IS $10.25. SEE "UNDERWRITING" FOR THE FACTORS CONSIDERED IN
DETERMINING THE PUBLIC OFFERING PRICE. THE PUBLIC OFFERING PRICE MAY NOT REFLECT
THE MARKET PRICE OF OUR COMMON STOCK AFTER THE OFFERING.
TRADING SYMBOL = NASDAQ NATIONAL MARKET--"CNBB"
WE URGE YOU TO READ CAREFULLY THE "RISK FACTORS" SECTION BEGINNING ON PAGE
7, ALONG WITH THE REST OF THIS PROSPECTUS, BEFORE YOU MAKE YOUR INVESTMENT
DECISION.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------------- ---------------------
<S> <C> <C>
Public Price...................................................... $10.25 $12,812,500
Underwriting Discount............................................. 0.70 875,000
Proceeds to Us.................................................... 9.55 11,937,500
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PLEASE NOTE THAT THESE SECURITIES:
- ARE NOT BANK ACCOUNTS OR DEPOSITS;
- ARE NOT FEDERALLY INSURED BY THE FDIC; AND
- ARE NOT INSURED BY ANY OTHER STATE OR FEDERAL AGENCY.
THE SHARES OF COMMON STOCK ARE BEING OFFERED BY THE UNDERWRITERS ON A FIRM
COMMITMENT BASIS. THE UNDERWRITERS HAVE AN OPTION TO PURCHASE UP TO 187,500
ADDITIONAL SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY, ON THE SAME
TERMS AND CONDITIONS AS SET FORTH ABOVE. SEE "UNDERWRITING."
[LOGO]
[LOGO]
THE DATE OF THIS PROSPECTUS IS JANUARY 29, 1999
<PAGE>
[LOGO]
CORE & EXPANSION MARKETS
[LOGO]
THIS PROSPECTUS CONTAINS STATEMENTS ABOUT THE FUTURE THAT MAY OR MAY NOT
MATERIALIZE. WHEN WE USE WORDS LIKE "ANTICIPATE," "BELIEVE," "ESTIMATE," "MAY,"
"INTEND," OR "EXPECT," WE ARE SPECULATING ABOUT WHAT WILL HAPPEN IN THE FUTURE.
THE OUTCOME MAY BE MATERIALLY DIFFERENT FROM OUR SPECULATIONS. WE BELIEVE THAT
THE FACTORS IDENTIFIED IN THE RISK FACTORS SECTION OR ELSEWHERE IN THIS
PROSPECTUS COULD CAUSE A DIFFERENT OUTCOME. THERE ALSO MAY BE OTHER FACTORS THAT
COULD CAUSE A DIFFERENT OUTCOME.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION FROM THIS PROSPECTUS. BECAUSE
THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, THE EXHIBITS AND OUR
CONSOLIDATED FINANCIAL STATEMENTS BEFORE YOU DECIDE TO PURCHASE THE STOCK.
UNLESS OTHERWISE INDICATED, WE HAVE ADJUSTED ALL PER SHARE INFORMATION IN THIS
PROSPECTUS FOR THE 2-FOR-1 STOCK SPLIT EFFECTIVE AUGUST 17, 1998. UNLESS
OTHERWISE INDICATED, WE HAVE NOT ADJUSTED THE INFORMATION IN THIS PROSPECTUS TO
ACCOUNT FOR THE UNDERWRITERS' EXERCISE OF THEIR OVER-ALLOTMENT OPTION.
THE COMPANY
IN GENERAL
We are a Florida corporation registered as a bank holding company. We
conduct our principal business through our wholly-owned bank subsidiary, CNB
National Bank, which accounts for almost all of our consolidated assets and
revenues. CNB National Bank currently has eleven branches in six counties in
Northeast Florida. As of September 30, 1998, we had consolidated assets of
$290.6 million, loans of $176.6 million, deposits of $249.2 million, and
stockholders' equity of $30.6 million, representing five year compound growth
rates of 24.2%, 23.1%, 23.1% and 27.7%, in the respective categories. Net income
for the nine months ended September 30, 1998 and for the year ended December 31,
1997, was $2.1 million and $3.0 million, respectively, as compared with $2.2
million and $2.3 million for the nine months ended September 30, 1997 and for
the year ended December 31, 1996, respectively. For the five years ended
December 31, 1997, the compound annual earnings growth rate was 43.1%. Through
our bank subsidiary, we offer a full range of deposit services and loan
products. See "Business--General."
MARKET OPPORTUNITY AND BUSINESS STRATEGY
Over the past few years, the banking industry in Northeast Florida has
experienced significant consolidation. Larger out-of-state institutions have
bought many of the community banks we used to compete with. We believe that many
middle-market corporate customers in Northeast Florida prefer to bank with
community banks, rather than with large, centralized institutions. We believe
that we offer more personalized service and that we can respond to changes in
our markets more quickly than large, centralized organizations. See
"Business--Evolution of the Florida Banking Market."
One example of the recent consolidation in the banking industry in Northeast
Florida occurred in January 1998 when Barnett Banks, Inc., which was a $40
billion institution headquartered in Jacksonville, was merged into NationsBank
Corp. NationsBank, now BankAmerica Corporation, is a super-regional bank
headquartered in Charlotte, North Carolina. This merger has allowed us to
attract some of Barnett's customers who prefer dealing with a bank that is
locally owned and operated. We believe that we can continue to benefit from that
merger by offering our more personalized products and services to Barnett's
historical customer base. See "Business--Evolution of the Florida Banking
Market."
We plan to capitalize on the consolidation of the Florida banking industry
by entering the Jacksonville market, which consists of Jacksonville, St.
Augustine, Orange Park, Ponte Vedra Beach, the Jacksonville Beaches, Fernandina
Beach and Amelia Island, included in the four counties of Nassau, Clay, Duval
and St. Johns. We believe that the expansion into the Jacksonville market
presents an attractive expansion opportunity for us. It is a natural extension
of our current operations, as it is geographically continguous to our current
markets. The population of the market has grown approximately 13.3% since 1990.
The current population exceeds one million people and is expected to grow to
approximately 1.2 million people by 2010. We have recently hired key employees
who have banking experience in the Jacksonville market, and we anticipate that
we will begin lending activities in Jacksonville during the first quarter of
1999.
We are in the process of acquiring a site in Jacksonville, using currently
available funds, where we plan to construct our new headquarters. We are raising
capital in this offering to support our planned expansion within our existing
banking offices, as well as the potential acquisition of existing branches and
smaller banks and thrifts as opportunities become available. The offering should
also provide a more active trading
3
<PAGE>
market for our common stock, which may facilitate mergers or acqusitions with
banking institutions that would be interested in a tax-free combination.
We plan to further capitalize on the opportunities created by recent bank
consolidations by expanding our existing operations in the Gainesville market,
which consists of Gainesville and the surrounding Alachua County. We entered the
Gainesville market in 1996 when we acquired two branches in connection with our
merger with Riherd Bank Holding Company, and we believe that we can continue to
expand successfully in the Gainesville market. The population of the Gainesville
market has grown approximately 14.3% since 1990. The city is the home of the
University of Florida, which in the fall of 1998 had approximately 46,000
full-time students and facility. See "Business--Demographics of Core and
Expansion Markets."
We also plan to expand our loan and deposit base in our core market, which
consists of Columbia, Suwannee, Baker, Bradford and Union Counties. Presently,
we hold a combined market share of 27% in the counties that comprise our core
market. The population of our core market has grown approximately 21.7% since
1990. During the same period, Florida's growth rate was approximately 13.7%.
During 1998 we invested in our infrastructure to take advantage of
opportunities created by consolidation of the banking industry in our region. We
anticipate this investment will continue in 1999. The expenses associated with
expansion are expected to negatively impact earnings until our projected growth
increases revenues. We believe we can increase profitability and shareholder
value by:
- Capitalizing on opportunities in the Jacksonville and Gainesville markets
created by recent bank consolidation;
- Expanding the loan and deposit base in our core markets;
- Improving our loan to deposit ratio while maintaining high asset quality;
- Increasing non-interest income; and
- Providing quality community banking services in our existing and expansion
markets.
See "Business--Business Strategy."
EXPANSION HISTORY
CNB National Bank was formed in 1986 and the holding company in 1987 to take
advantage of expansion opportunities. Since our formation in 1987, we have
expanded and now have offices in six counties in Northeast Florida. In 1988, we
organized Citizens Bank of Live Oak, which was merged into CNB National Bank in
November 1992. We expanded by opening new branches, by buying branches from
other banks, and by merger with other bank holding companies. Our acquisitions,
as well as their years of completion, are summarized as follows:
<TABLE>
<CAPTION>
DEPOSITS
ACQUISITIONS YEAR ACQUIRED (1)
----------------------------------------------------------------- --------- ---------------
<S> <C> <C> <C>
- - Acquired one branch from Anchor Saving Bank...................... 1992 $ 10.9 million
- - Acquired two additional branches from Anchor..................... 1993 $ 48.9 million
- - Merged with Bradford Bankshares (1 branch)....................... 1994 $ 11.9 million
- - Riherd Bank Holding Company merged with us
(3 branches)..................................................... 1996 $ 43.4 million
</TABLE>
- ------------------------
(1) Represents deposits at the time of acquisition.
We now have a total of eleven branches in the Northeast Florida counties of
Columbia, Suwannee, Baker, Bradford, Union and Alachua. See "Business--Company
Properties."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Outstanding as of
December 10, 1998............. 4,856,770 shares
Common Stock Offered by Us...... 1,250,000 shares (1)
Common Stock to be Outstanding
after the Offering............ 6,106,770 shares (1) (2)
Use of Proceeds................. To increase capital to support internal and external
expansion and for general corporate purposes.
Nasdaq National Market Symbol... The Company's Common Stock has been approved for quotation
on the Nasdaq National Market under the symbol "CNBB."
</TABLE>
- ------------------------
(1) Excludes 187,500 shares of Common Stock issuable upon full exercise of the
Underwriter's overallotment option.
(2) Excludes 359,766 shares of Common Stock issuable under stock options granted
by the Company, 179,884 of which are currently exercisable.
SUMMARY OF RECENT DEVELOPMENTS
Data set forth below as of or for the year ended December 31, 1998 is
derived from the unaudited consolidated financial statements of the Company. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of such results for the unaudited
period have been made. The selected historical financial data set forth below as
of December 31, 1997 and for the year then ended is derived in part from the
audited consolidated financial statements of the Company and is qualified in its
entirety by and should be read in conjunction with, the audited consolidated
financial statements as of and for the year ended December 31, 1997, including
the notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
SUMMARY OF OPERATIONS:
(DOLLARS IN THOUSANDS)
Net Income............................................................................. $2,679 $2,975
PER COMMON SHARE (1):
Basic Earnings......................................................................... $ 0.55 $ 0.69
Weighted Average Shares Outstanding.................................................... 4,856,770 4,327,534
BALANCE SHEET DATA:
(DOLLARS IN MILLIONS)
Total Assets........................................................................... $311.6 $273.3
Total Loans............................................................................ 187.0 159.6
Total Deposits......................................................................... 265.1 231.4
</TABLE>
- ------------------------
(1) Per share data figures reflect the two-for-one stock split effective August
17, 1998.
Net income for the year ended December 31, 1998 was $2.7 million, $296,000
lower than net income for the year ended December 31, 1997. Basic earnings per
share for the year ended December 31, 1998 were $0.55 versus $0.69 for the year
ended December 31, 1997.
The decline in 1998 earnings is essentially attributable to two factors.
Increased personnel costs, primarily related to the Company's expansion plans,
resulted in an increase in noninterest expense. See "Business--Business
Strategy." The second factor was a decision on the part of management to
increase
5
<PAGE>
the provision for loan losses in order to bring the allowance for loan losses at
December 31, 1998 to a level approximately equal to 1.00% of the loan portfolio.
Per share earnings for 1998 were also adversely impacted by the completion
of the Company's Rights Offering in July 1997. As a result of the offering
weighted average shares outstanding for the year ended December 31, 1998
increased to 4,856,770, 12% higher than 4,327,534 for the year ended December
31, 1997.
Total assets increased to $312 million at December 31, 1998 from $273
million at December 31, 1997. Total loans increased from $160 million at
December 31, 1997 to $187 million at December 31, 1998. The growth in assets was
funded primarily through an increase in deposits, from $231 million at December
31, 1997 to $265 million at December 31, 1998.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents a summary of selected financial information
which you should read together with our financial statements and the notes
thereto included elsewhere in this prospectus.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, (1) YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) 1998 1997 1997 1996 1995 1994 1993
- --------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
SUMMARY OF OPERATIONS:
Interest Income.................................... $ 15,666 $ 14,400 $ 19,420 $ 15,090 $ 12,745 $ 10,303 $ 6,772
Interest Expense................................... 6,992 6,416 8,663 6,612 5,966 4,632 2,698
Net Interest Income................................ 8,674 7,984 10,757 8,478 6,779 5,671 4,074
Provision for Loan Losses.......................... 400 330 440 335 230 125 173
Noninterest Income................................. 1,716 1,619 2,153 1,777 1,478 1,330 1,180
Noninterest Expense................................ 6,835 5,848 7,914 6,360 5,172 4,819 3,734
Net Income......................................... 2,067 2,235 2,975 2,313 1,841 1,326 707
Dividends Paid..................................... 729 426 620 379 295 131 --
PER COMMON SHARE:(2)
Basic Earnings..................................... $ 0.43 $ 0.54 $ 0.69 $ 0.67 $ 0.56 $ 0.43 $ 0.28
Diluted Earnings................................... 0.42 0.53 0.68 0.65 0.55 0.43 0.28
Book Value......................................... 6.29 5.86 5.98 5.08 4.50 3.94 3.69
Tangible Book Value................................ 6.00 5.52 5.66 4.63 4.22 3.61 3.23
Dividends.......................................... 0.15 0.10 0.14 0.11 0.09 0.04 0.00
Weighted Average Shares Outstanding................ 4,856,770 4,152,656 4,327,534 3,478,248 3,279,466 3,088,114 2,503,216
Diluted Weighted Average Shares Outstanding........ 4,969,978 4,211,864 4,406,616 3,547,390 3,338,674 3,136,744 2,549,122
BALANCE SHEET DATA:
Assets............................................. $ 290,566 $ 266,158 $ 273,331 $ 254,945 $ 176,733 $ 168,512 $ 149,561
Total Loans, Net................................... 175,020 157,168 158,154 147,428 101,403 85,220 65,010
Total Deposits..................................... 249,173 229,593 231,444 226,824 159,003 152,612 136,870
Long-Term Debt..................................... -- 1,750 1,450 2,650 950 1,700 2,000
Short-Term Borrowings.............................. 7,635 4,172 9,157 3,766 -- -- --
Shareholders' Equity............................... 30,555 28,370 29,025 19,669 14,754 12,927 9,229
SELECTED FINANCIAL RATIOS:
Return on Average Assets........................... 0.97% 1.16% 1.14% 1.14% 1.06% 0.81% 0.67%
Return on Average Equity........................... 9.27 13.30 12.38 13.88 13.24 11.28 8.09
Dividend Payout.................................... 34.88 18.52 20.29 16.54 16.07 8.70 --
Efficiency (3)..................................... 65.78 60.90 61.30 62.02 62.64 68.83 71.07
Net Interest Margin (4)............................ 4.47 4.53 4.52 4.59 4.30 3.79 4.35
Net Interest Spread (5)............................ 3.79 3.94 3.90 4.03 3.76 3.43 3.95
ASSET QUALITY RATIOS:
Net Charge-offs to Average Loans................... 0.23% 0.21% 0.22% 0.22% 0.12% 0.20% 0.09%
Allowance to Period End Loans...................... 0.91 0.93 0.94 0.94 0.92 0.96 1.05
Allowance for Loan Losses to
Nonperforming Loans................................ 145.37 111.17 124.27 441.77 178.15 96.73 204.14
Nonperforming Assets to Total Assets............... 0.61 0.53 0.56 0.16 0.37 0.54 0.33
CAPITAL RATIOS:
Tier 1 Leverage Ratio.............................. 9.92% 10.13% 10.20% 7.25% 7.87% 7.56% 5.89%
Risk-Based Capital
Tier 1........................................... 16.58 17.30 17.70 12.60 13.70 14.00 12.40
Total............................................ 17.51 18.24 18.67 13.58 14.90 15.30 13.90
Average Equity to Average Assets................... 10.51 8.70 9.22 8.24 7.99 7.18 8.27
OTHER DATA:
Banking Locations.................................. 11 11 11 10 7 7 6
Full-time Equivalent Employees..................... 151 141 144 134 95 87 73
</TABLE>
- ------------------------------
(1) Ratios, where appropriate, are presented on an annualized basis.
(2) Per share data figures reflect the two-for-one stock split effective August
17, 1998. Share information has been adjusted for years 1993 and 1994 to
account for the exchange ratio used in the merger with Bradford Bankshares,
Inc. Each share of common stock of the previous CNB, Inc. was converted into
1.5384 shares of stock in the continuing company effective April 1, 1994.
Prior to this adjustment, earnings per share for 1993 and 1994 were $0.43
and $0.46, respectively.
(3) Efficiency ratio is noninterest expense divided by the sum of net interest
income and noninterest income.
(4) Net interest margin is net interest income divided by total average earning
assets.
(5) Net interest spread is the difference between the average yield on average
earning assets and the average yield on average interest bearing
liabilities.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves risk. Before you buy any common
stock in this offering, you should consider carefully the factors outlined
below. In addition to the following factors, you should consider the other
information contained in this prospectus and the information that we refer you
to.
GENERAL RISKS OF EXPANDING AND MANAGING GROWTH
We intend to grow aggressively for the foreseeable future. We plan to add at
least five more branches within the next two years and potentially acquire other
community banks. Our ability to, among other things, identify suitable sites for
our new offices, integrate acquired operations, build our customer base, manage
credit risks, control costs, provide competitive products and services, attract,
motivate and retain qualified bank management and maintain adequate capital will
affect our future results of operations. See "Business--Business Strategy."
We may not be able to increase the volume of our loans and deposits at
acceptable risk levels and upon acceptable terms. The expansion process may
divert management time and resources. Integrating newly established offices also
may cause disruption and unexpected expenses. We may not be able to integrate
successfully, or to operate profitably, any newly established or acquired
office.
We have hired additional personnel to facilitate our expansion efforts. We
will need to hire more personnel in 1999. These additions have had a negative
impact on earnings and are expected to continue to negatively impact future
earnings until and unless we generate sufficient additional net interest income,
fee income, deposits and loan growth, which we cannot be certain that we will be
able to do.
ABILITY TO FIND SUITABLE SITES FOR EXPANSION
We plan to expand by opening new branches, but we also may buy existing
branches from other financial institutions. If we decide to buy existing
branches, we will have to compete with other bidders for the branches. The other
bidders may have more financial resources and may outbid us. If we cannot find
suitable sites for our new locations, we may not be able to expand successfully.
GREATER COMPETITION IN JACKSONVILLE AND GAINESVILLE MARKETS
The Jacksonville and Gainesville markets include competitors who have more
financial and operational resources than we do. Some of these competitors may
have a better understanding of the Jacksonville and Gainesville markets. When we
expand our operations in these markets, we may not be able to build a customer
base and compete successfully in the new markets.
NEED FOR QUALIFIED PERSONNEL IN JACKSONVILLE AND GAINESVILLE MARKETS
Because we believe local management will drive the success of our business
strategy, we will give significant local decision-making authority to the senior
officers and managers in our new locations. When we expand in the Gainesville
market and enter the Jacksonville market, we will need to hire additional,
well-trained, senior management and other employees. We cannot be certain that
we can hire the necessary qualified management personnel in the Jacksonville and
Gainesville markets. Failure to hire the right people in the Jacksonville and
Gainesville markets could materially adversely affect our business, future
prospects, financial condition or results of operations.
INCREASING COMPETITION
We compete with other bank holding companies, state and national commercial
banks, savings and loan associations, consumer finance companies, credit unions,
securities brokerages, insurance companies, mortgage banking companies, money
market mutual funds, asset-based non-bank lenders and other financial
institutions. Many of these competitors have substantially greater resources and
lending limits, have larger branch networks and are able to offer a broader
range of products and services than we do.
Recent changes in the law have increased competition among financial
institutions. Such changes have enabled out-of-state financial institutions to
enter the Florida market. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard
8
<PAGE>
to geographic barriers through computer and telephone-based banking and similar
services. The United States Congress or the Florida Legislature or the
applicable bank regulatory agencies could pass laws or rules that may further
increase competition. If we are unable to compete effectively for deposit, loan
and other banking services with customers in our markets, it will materially
adversely affect our business, future prospects, financial condition and results
of operations. See "Business--Competition."
Competition from credit unions for deposits and loans may increase. Credit
unions are not-for-profit cooperative lending organizations that are not subject
to certain federal taxes and fees or the Community Reinvestment Act that we are
subject to. As a result of their lower operating costs, they may be able to
offer slightly higher interest rates on deposit accounts and slightly lower
interest rates on consumer loans. In August 1998, Congress passed a law that
loosened the membership restrictions that previously required credit unions to
serve a limited number of customers who share common employers or professions.
The new law may increase credit unions' competitive advantage.
DEPENDENCE ON KEY PERSONNEL
We are, and for the foreseeable future will be, dependent upon the services
of K.C. Trowell, our Chief Executive Officer, as well as certain other senior
executive officers and managers. We do not maintain key person life insurance
with respect to any of our officers. The loss of key individuals could
materially adversely affect our business, future prospects, financial condition
or results of operations. See "Management."
CREDIT RISK AND LOAN CONCENTRATION; ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
Making any loan involves risks, including risks resulting from changes in
economic and industry conditions, associated with the creditworthiness of
individual borrowers, and resulting from uncertainties as to the future value of
collateral.
Commercial loans do not comprise the bulk of our loans in our core markets.
We will need to increase our commercial lending in order to meet our expansion
goals. We expect to focus our commercial lending on loans to small and
medium-sized businesses, which may result in a large concentration of loans to
such businesses. Our management will try to minimize our credit exposure by
carefully monitoring the concentration of loans within specific industries and
by using prudent loan approval procedures. However, such monitoring and
procedures may not reduce lending risks. Additionally, as we expand into new
geographic markets, our credit administration and loan underwriting policies
will have to adapt to the local lending and economic environments. We cannot be
certain that our credit administration personnel, policies and procedures can
adequately adapt to the new geographic markets.
We establish our allowance for loan losses after considering a wide variety
of factors. We will maintain the allowance at a level that management considers
adequate to cover inherent loan losses. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates. Such changes may be beyond our control and losses may
exceed current estimates. Although we believe that the allowance for loan losses
is adequate to absorb losses on any existing loan that may become uncollectible,
we cannot be certain that the allowance will be enough to cover actual loan
losses in the future. See "Management's Discussion and Analysis--Results of
Operations."
If we do not adapt our credit policies and procedures to changes in the
market on an adequate and timely basis, or provide sufficient oversight to our
lending activities, then nonperforming assets could increase. An increase in
nonperforming assets would cause operating losses, impair liquidity and erode
capital, and could materially adversely affect our business, future prospects,
financial condition or results of operations.
GEOGRAPHIC CONCENTRATION OF REAL ESTATE LOANS
On September 30, 1998, real estate loans, which include residential
mortgages and construction and commercial loans secured by real estate,
comprised 75.0% of our total loan portfolio, net of deferred loan fees. We
presently generate all of our real estate mortgage loans in Northeast Florida.
Therefore, conditions of the Northeast Florida real estate market could strongly
influence the level of our
9
<PAGE>
non-performing mortgage loans and our results of operations and financial
condition. Changes in general or local economic conditions, changes in
government rules or policies, and the availability of loans to potential
purchasers, among other things, affect real estate values and the demand for
mortgages and construction loans. In addition, Florida is vulnerable to certain
natural disaster risks, such as floods, hurricanes and tornadoes, which
borrowers' standard hazard insurance policies typically do not cover. Uninsured
disasters may prevent borrowers from repaying the loans we have made. The
existence of adverse economic conditions, declines in real estate values or the
occurrence of natural disasters in Florida could materially adversely affect our
business, future prospects, financial condition or results of operations. In
addition, loans secured by real estate subject us to risks associated with
environmental regulation. See "Management's Discussion and Analysis--Financial
Condition" and "Business--Loan Products and Lending Policy." In the event our
measures are inadequate, failures of our systems or the systems of our borrowers
or third party vendors could materially adversely impact our business, future
prospects, financial condition or results of operations.
YEAR 2000 ISSUES
Many companies, including financial institutions like our bank subsidiary,
face potentially serious issues associated with the inability of existing data
processing hardware and software to appropriately recognize calendar dates
beginning in the year 2000. Many computer programs that can only distinguish the
final two digits of the year entered may read entries for the year 2000 as the
year 1900 and erroneously compute payments, interest charges or delinquencies
accordingly. Year 2000 issues relate to our computer hardware and software
systems and other devices employing computer chips as well as those of our third
party vendors. We are currently identifying and correcting the software
applications and hardware devices that we expect this issue to impact. We expect
to complete substantially all of the computer system and application changes by
the end of 1998. However, we cannot assume that all necessary modifications will
be identified and corrected, and unforeseen difficulties or costs may arise. In
addition, we cannot assure that our systems, or the systems of the companies
that we rely on, will be modified on a timely basis. The failure of another
company to properly modify its systems may negatively impact our systems or
operations. See "Management's Discussion and Analysis--Year 2000."
Year 2000 issues also may negatively affect the businesses of some of our
customers. Any financial difficulties incurred by our customers in solving Year
2000 issues could negatively affect their ability to repay loans that we
extended. The failure or delay of our customers or other third parties in
addressing the Year 2000 issue could materially adversely affect our business,
future prospects, financial condition, or results of operations. In addition,
public overreaction to Year 2000 issues also could adversely affect us. See
"Management's Discussion and Analysis--Year 2000."
IMPACT OF GOVERNMENT REGULATION
As a registered bank holding company, we are subject to the supervision of,
and regular examination by, the Federal Reserve Board. Our bank subsidiary is a
national banking association, which is subject to regulation, supervision and
examination by the Office of the Comptroller of the Currency. In addition, we
are subject to various other laws and regulations and supervision and
examination by other regulatory agencies, all of which directly or indirectly
affect our operations and management and our ability to distribute dividends.
These regulations protect and benefit depositors and customers rather than our
shareholders.
We are subject to future legislation and government policy, including bank
deregulation and interstate expansion, which could materially adversely affect
the banking industry as a whole, including our operations. We must receive prior
regulatory approval before we can establish new branches or acquire another
bank. If we cannot obtain regulatory approvals of our expansion plans, then our
business, future prospects, financial condition or results of operations could
be materially adversely affected. See "Supervision and Regulation."
10
<PAGE>
INTEREST RATE RISK
Our results of operations are directly affected by levels of, and
fluctuations in, interest rates. Changes in interest rates could reduce our net
interest income, reduce gains from loan sales, result in higher loan losses, and
reduce loan originations and corresponding loan servicing income.
A substantial and/or sustained increase in interest rates could prevent us
from originating or selling loans with returns consistent with past practices.
It could also prevent borrowers with variable rate loans from meeting scheduled
debt service requirements. A rapid increase or decrease in interest rates could
materially adversely affect our net interest margin, future prospects, financial
condition or results of operations because of imbalances in the maturities of
our assets and liabilities and the mix of our adjustable and fixed rate loans.
Interest rates are highly sensitive to many factors that are beyond our
control, including general economic conditions and the policies of various
government and regulatory authorities. Changes to the discount rate by the
Federal Reserve Board usually lead to corresponding interest rate changes, which
affect our interest income, interest expense and the value of our investment
portfolio. Also, governmental policies, such as the creation of a tax deduction
for individual retirement accounts, can alter the rate of savings and affect the
costs of funds. The nature, timing and effect on us and our results of
operations of any future changes in federal monetary and fiscal policies are not
predictable. Such changes could materially adversely affect our business, future
prospects, financial condition or results of operation. See "Management's
Discussion and Analysis--Financial Condition."
POTENTIAL FLUCTUATION IN QUARTERLY RESULTS AND VOLATILITY OF STOCK PRICE
The trading price of our common stock could fluctuate significantly in
response to quarterly variations in our actual or anticipated operating results,
changes in general market conditions and other factors. In particular, we cannot
forecast our quarterly revenues with complete accuracy and we base our expense
levels in part on our expansion plans in anticipation of revenues generated from
loan growth and new branch locations. If revenue levels are below expectations,
we may not be able to reduce expenses proportionately on a timely basis and
operating results probably would be adversely affected. Before we fully
implement our business strategy, period to period comparisons of our results may
not be meaningful and you should not rely on them to predict future performance.
In some future quarter our operating results may be below the expectations of
public market analysts and investors, which may materially adversely affect the
market price of our common stock. In recent years, significant price and volume
fluctuations have occurred in the stock prices of companies that often have been
unrelated or disproportionate to their operating performance. The market price
of our common stock may not stay at or above the initial public offering price.
UNPREDICTABLE ECONOMIC CONDITIONS
Economic and political conditions, both domestic and international, and
governmental monetary policies affect commercial banks and other financial
institutions. Conditions such as inflation, recession, unemployment, volatile
interest rates, restricted money supply, scarce natural resources, international
disorders and other factors beyond our control may adversely affect our
profitability.
General economic conditions in Florida, both in our current markets and the
Jacksonville and Gainesville markets, will significantly determine our success.
A prolonged economic dislocation or recession, whether in Florida generally or
in any or all of our markets, could cause our non-performing assets to increase,
which could cause operating losses, impaired liquidity and the erosion of
capital. Such an economic dislocation or recession could result from a variety
of causes, including natural disasters such as hurricanes, floods or tornadoes,
or a prolonged downturn in the various industries upon which the economies of
Florida and/or our particular markets depend. Future adverse changes in the
Florida economy or our local markets could materially adversely affect our
business, future prospects, financial condition or results of operations.
11
<PAGE>
IMPACT OF TECHNOLOGICAL ADVANCES
The banking industry is undergoing technological changes with frequent
introductions of new technology-driven products and services. Management
believes this trend will continue. Our ability to use technology to provide
products and services that will satisfy customer demands for convenience, as
well as to enhance efficiencies in our operations, may influence our success. In
addition to improving customer services, the effective use of technology
increases efficiency and enables financial institutions to reduce costs.
Management believes that keeping pace with technological advances is important,
as long as it does not adversely impact our emphasis on personalized services.
While we seek to improve our capacity to use technological innovations, our
strategy is based on the belief that customer demand for personal contact and
strategically placed branch offices will continue for the foreseeable future.
Thus, we are continuing to expand our branch network and to provide customers
ready access to qualified personnel at a time when many banks are consolidating
their branch networks and automating customer responses. We cannot be certain
this strategy will succeed. Technological advances of our competitors may result
in the loss of customer relationships.
The sophistication of our business requires us to use thorough and accurate
management information systems. If we fail to effectively implement, maintain,
update and use updated management information systems, it could prevent us from
recognizing in a timely manner any deterioration in the performance of our
business. Many of our competitors have substantially greater resources to invest
in technological and infrastructure improvements. We cannot assure that we can
implement new technology-driven products and services effectively or that we can
market successfully such products and services to our clients. Our failure to
acquire, implement or market new technology could materially adversely affect
our business, future prospects, financial condition or results of operations.
COMMON STOCK IS NOT AN INSURED BANK DEPOSIT
Shares of our common stock are not deposits, savings accounts or other
obligations and are not guaranteed by us or any other entity. They will not be
insured by the Federal Deposit Insurance Corporation or any other governmental
agency and may not be used as collateral to secure a loan from us or any of our
affiliates. See "Description of the Company's Capital Stock."
BROAD DISCRETION IN USE OF PROCEEDS
We will have broad discretion in the application of the net proceeds from
this offering. Upon closing of the offering, we intend to contribute a
significant amount of the net proceeds to the capital of our bank subsidiary to
support future growth of its business. The remainder of the net proceeds will be
applied in the future as needed to implement our expansion strategy. We intend
to accomplish our expansion primarily by opening additional branches in
Jacksonville and Gainesville, but we also could acquire one or more existing
financial institutions or branches of other financial institutions. The timing
and specific application of the net proceeds will remain in the discretion of
our management. You will not have the opportunity to evaluate the economic,
financial and other relevant information that we will use to determine the
application of the proceeds. See "Use of Proceeds."
NO ESTABLISHED TRADING MARKET
Because all of our common stock has been closely held prior to this
offering, only a limited market for our common stock exists and an active public
trading market for our common stock may not develop after the offering. If a
market develops, it may not be substantial. We have applied to have our common
stock listed on the Nasdaq National Market. A condition of the initial
qualification for quotation of our common stock is the presence of three market
makers, and a condition of the continued qualification is the presence of two
market makers. The underwriters have advised us that they intend to make a
market in our common stock following the completion of this offering so long as
the volume of trading activity and certain market-making considerations justify
their doing so. We cannot be certain that there will be three or more market
makers for our common stock. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those prices, subject to securities laws and regulatory
constraints. Additionally, the development of a liquid public market depends on
the
12
<PAGE>
existence of willing buyers and sellers, the presence of which is not within our
control or the control of any market maker. The number of active buyers and
sellers of our common stock at any particular time may be limited. Under such
circumstances, you could have difficulty disposing of your shares of our common
stock on short notice. You should not view our common stock as a short-term
investment.
The public offering price of our common stock was determined by negotiations
between us and the underwriters. Our common stock may trade at a different price
after the offering. We cannot be certain whether you will be able to sell your
shares of our common stock at or above the price at which you bought them. See
"Market for Common Stock" and "Underwriting."
ABILITY TO PAY DIVIDENDS; POSSIBLE ISSUANCE OF ADDITIONAL SECURITIES
We conduct our principal business through our national bank subsidiary.
Although we hold all of the outstanding capital stock of our bank subsidiary, we
are a separate and distinct legal entity. In the future, we may issue securities
that have an equal or greater dividend preference to the common stock. Our
ability to pay dividends on our common stock depends significantly on the
ability of our bank subsidiary to pay dividends to us in amounts sufficient to
service our obligations. Such obligations may include an obligation to make any
payments with respect to securities issued in the future which have an equal or
greater dividend preference to the common stock. In addition, our bank
subsidiary may issue additional capital stock or incur indebtedness. See
"Dividends."
The regulations of the Office of the Comptroller of the Currency, regulatory
capital levels and the net income of our bank subsidiary, determine its ability
to pay dividends or make other capital distributions. See "Supervision and
Regulation."
IMMEDIATE DILUTION
You will incur immediate dilution in the net tangible book value of your
shares of common stock following this offering. Current shareholders will
receive a substantial increase in the book value of their shares. If we issue
additional shares of our common stock in the future, including shares that may
be issued in connection with acquisitions, you may experience further dilution
in the net tangible book value per share of your common stock. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 1,642,014 shares of our common stock issued and outstanding
are subject to the volume limitations and the manner of sale restrictions of
Rule 144 of the Securities Act. Sales of these shares may have a depressive
effect on the price of our common stock in the market.
Our executive officers and directors, the affiliates of each, and our
shareholders owning more than 5% of our common stock, which collectively hold
all of the foregoing shares of our common stock subject to Rule 144, have agreed
not to sell, contract to sell or otherwise dispose of any of our common stock
for a period of 180 days after the completion of this offering.
USE OF PROCEEDS
The net proceeds to CNB, Inc. (the "Company") from this offering (the
"Offering"), after deducting the underwriting discount and estimated expenses,
are projected to be approximately $11.4 million (approximately $13.2 million if
the Underwriters' over-allotment option is exercised in full). The Company
intends to contribute approximately $10 million of the net proceeds to the
capital of CNB National Bank (the "Bank") to support its growth strategies, and
the remainder of the net proceeds will be used by the Company to support future
expansion of the Bank or for general corporate purposes.
13
<PAGE>
DILUTION
The net tangible book value of the common stock of the Company, $.01 par
value (the "Common Stock") as of September 30, 1998, was $29.1 million, or $6.00
per share. Net tangible book value per share represents the equity of the
Company's stockholders, less intangible assets, divided by the number of shares
of Common Stock outstanding. The dilution of the net tangible book value per
share represents the difference between the amount per share paid by purchasers
of Common Stock in this Offering and the pro forma net tangible book value
(liquidation value) per share of Common Stock immediately after completion of
this Offering. After (i) giving effect to the sale by the Company of 1,250,000
shares of Common Stock offered hereby at the public offering price of $10.25 per
share and the application of the estimated net proceeds therefrom, and (ii)
deducting the estimated underwriting discount and offering expenses payable by
the Company, the pro forma net tangible book value of the Company as of
September 30, 1998, would have been $40.6 million, or $6.65 per share. This
represents an immediate increase in net tangible book value of $0.65 per share
to existing investors and an immediate dilution in net tangible book value of
$3.60 per share to new investors purchasing Common Stock in this Offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share............................... $ 10.25
Net tangible book value per share before this Offering........ 6.00
Increase in net tangible book value per share attributable to
new investors............................................... 0.65
---
Pro forma net tangible book value per share after this
Offering.................................................... 6.65
---------
Dilution between offering price and net tangible book value
per share................................................... $ 3.60
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis, as of September 30,
1998, the tangible book value of the outstanding shares and the total
consideration and average price paid per share by the new investors for the
shares purchased in this Offering:
<TABLE>
<CAPTION>
TANGIBLE EQUITY
SHARES (1) (IN THOUSANDS) AVERAGE
----------------------- ---------------------- -----------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shareholders at September 30, 1998....................... 4,856,770 80% $ 29,142 72% $ 6.00
New Investors............................................ 1,250,000 20 11,438(2) 28 10.25
---------- --- --------- ---
Total.................................................... 6,106,770 100% $ 40,580 100% $ 6.65
---------- --- --------- ---
---------- --- --------- ---
</TABLE>
- ------------------------
(1) Does not include total shares of Common Stock issuable upon exercise of
outstanding stock options. See "Management--Employee Benefits."
(2) Net of underwriting discount of $875,000 and estimated offering expenses of
approximately $500,000.
14
<PAGE>
MARKET FOR COMMON STOCK
Prior to this Offering, there has been no public market for the Common
Stock, and only isolated, privately negotiated sales of the Common Stock have
occurred. The Company had 545 shareholders and 4,856,770 shares of Common Stock
outstanding as of November 30, 1998. The members of the Board of Directors own
or control 1,632,642 shares of Common Stock which represents 34% of the shares
of Common Stock outstanding. In July 1997, the Company consummated a rights
offering whereby it sold 968,960 additional shares of Common Stock to existing
shareholders at $7.00 per share (the "Rights Offering"), as adjusted for the
2-for-1 stock split effective August 17, 1998. Those transactions may not be
representative of the value of the Common Stock.
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "CNBB." One of the requirements for initial
listing is the presence of three market makers and a requirement of continued
listing is the presence of two market makers. There can be no assurance that an
active and liquid trading market for the Common Stock will develop or be
maintained or that quotation of the Common Stock will be available on the Nasdaq
National Market as contemplated.
DIVIDENDS
Since 1993, the Company has paid the following annual amounts on a per share
basis as dividends to its shareholders:
<TABLE>
<CAPTION>
YEAR AMOUNT PER SHARE
- --------------------------------------------------------------------------- -----------------
<S> <C>
1998....................................................................... $.20
1997....................................................................... .14
1996....................................................................... .11
1995....................................................................... .09
1994....................................................................... .04
1993....................................................................... --
</TABLE>
The Board of Director's dividend policy is to review the Company's financial
performance, capital adequacy, cash resources, regulatory restrictions, economic
conditions and other factors, and if the results of such review are favorable,
to declare and pay a cash dividend. The Company's current quarterly dividend is
$.05 per share. The ability of the Company to pay dividends will depend on the
profitability of the Bank, the need to retain or increase capital, and the
dividend restrictions imposed upon the Bank by applicable banking law. See
"Supervision and Regulation." Although the Company anticipates payment of a
regular quarterly cash dividend, future dividends are subject to these
limitations and to the discretion of the Board of Directors, and could be
reduced or eliminated.
15
<PAGE>
CAPITALIZATION
The following table, which should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto (the "Financial Statements")
contained elsewhere in this Prospectus, presents the capitalization of the
Company at September 30, 1998, on an actual basis and as adjusted for the
issuance of 1,250,000 shares of Common Stock offered by the Company hereby and
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------
AS
ACTUAL ADJUSTED(1)
--------- -------------
<S> <C> <C>
(DOLLARS)IN THOUSANDS
Shareholders' equity:
Preferred Stock, $.01 par value; 500,000 shares authorized; no shares issued and
outstanding......................................................................... -- --
Common Stock, $.01 par value, 10,000,000 shares authorized; 4,856,770 shares issued
and outstanding, 6,106,770 shares as adjusted(2).................................... $ 49 $ 61
Additional Paid-in Capital............................................................ 19,465 30,890
Retained earnings..................................................................... 10,594 10,594
Unrealized gain on investment securities available for sale, net of taxes............. 447 447
--------- -------------
Total shareholders' equity........................................................ $ 30,555 $ 41,992
--------- -------------
--------- -------------
Capital Ratios:
Total risk-based capital ratio........................................................ 17.5% 24.1%
Tier I risk-based capital ratio....................................................... 16.6% 23.2%
Leverage ratio........................................................................ 9.9% 13.9%
</TABLE>
- ------------------------
(1) At the public offering price of $10.25 per share and assumes no exercise of
the Underwriters' over-allotment option. See "Underwriting."
(2) Does not include 144,334 shares issuable as of September 30, 1998, at prices
ranging from $3.06 per share to $7.00 per share upon exercise of currently
exercisable outstanding options. See "Management."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The information presented below for the years ended December 31, 1997, 1996,
1995, 1994 and 1993 is derived in part from the Company's audited financial
statements. 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 Prospectus.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE ------------------------ --------------------------------------------------
DATA) 1998 1997 1997 1996 1995 1994
- ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Total Interest Income.......................... $ 15,666 $ 14,400 $ 19,420 $ 15,090 $ 12,745 $ 10,303
Total Interest Expense......................... (6,992) (6,416) (8,663) (6,612) (5,966) (4,632)
----------- ----------- ----------- ----------- ----------- -----------
8,674 7,984 10,757 8,478 6,779 5,671
Provision for Loan Losses...................... (400) (330) (440) (335) (230) (125)
----------- ----------- ----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan
Losses....................................... 8,274 7,654 10,317 8,143 6,549 5,546
Noninterest Income............................. 1,716 1,619 2,153 1,777 1,478 1,330
Noninterest Expense............................ (6,835) (5,848) (7,914) (6,360) (5,172) (4,819)
----------- ----------- ----------- ----------- ----------- -----------
Income Before Taxes and Cumulative Effect of
Change in Accounting Principle............... 3,155 3,425 4,556 3,560 2,855 2,057
Income Taxes................................... (1,088) (1,190) (1,581) (1,247) (1,014) (731)
----------- ----------- ----------- ----------- ----------- -----------
Net Income Before Cumulative
Effect of Change in Accounting Principle..... 2,067 2,235 2,975 2,313 1,841 1,326
Cumulative Effect of Change in Accounting
Principle.................................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net Income..................................... $ 2,067 $ 2,235 $ 2,975 $ 2,313 $ 1,841 $ 1,326
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
PER COMMON SHARE DATA: (1)
Income Before Cumulative Effect of Change in
Accounting Principle......................... $ 0.43 $ 0.54 $ 0.69 $ 0.67 $ 0.56 $ 0.43
Cumulative Effect of Change in Accounting
Principle.................................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Basic Earnings................................. $ 0.43 $ 0.54 $ 0.69 $ 0.67 $ 0.56 $ 0.43
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Diluted Earnings............................... $ 0.42 $ 0.53 $ 0.68 $ 0.65 $ 0.55 $ 0.43
Book Value..................................... 6.29 5.86 5.98 5.08 4.50 3.94
Tangible Book Value............................ 6.00 5.52 5.66 4.63 4.22 3.61
Dividends...................................... 0.15 0.10 0.14 0.11 0.09 0.04
Actual Shares Outstanding...................... 4,856,770 4,844,770 4,856,770 3,875,810 3,279,466 3,279,466
Weighted Average Shares
Outstanding................................ 4,856,770 4,152,656 4,327,534 3,478,248 3,279,466 3,088,114
Diluted Weighted Average Shares
Outstanding................................ 4,969,978 4,211,864 4,406,616 3,547,390 3,338,674 3,136,744
BALANCE SHEET DATA:
Assets......................................... $ 290,566 $ 266,158 $ 273,331 $ 254,945 $ 176,733 $ 168,512
Total Loans, net............................... 175,020 157,168 158,154 147,428 101,403 85,220
Total Deposits................................. 249,173 229,593 231,444 226,824 159,003 152,612
Long-Term Debt................................. -- 1,750 1,450 2,650 950 1,700
Short-Term Borrowings.......................... 7,635 4,172 9,157 3,766 -- --
Shareholders' Equity........................... 30,555 28,370 29,025 19,669 14,754 12,927
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE
DATA) 1993
- ----------------------------------------------- -----------
<S> <C>
SUMMARY OF OPERATIONS:
Total Interest Income.......................... $ 6,772
Total Interest Expense......................... (2,698)
-----------
4,074
Provision for Loan Losses...................... (173)
-----------
Net Interest Income After Provision for Loan
Losses....................................... 3,901
Noninterest Income............................. 1,180
Noninterest Expense............................ (3,734)
-----------
Income Before Taxes and Cumulative Effect of
Change in Accounting Principle............... 1,347
Income Taxes................................... (469)
-----------
Net Income Before Cumulative
Effect of Change in Accounting Principle..... 878
Cumulative Effect of Change in Accounting
Principle.................................... (171)
-----------
Net Income..................................... $ 707
-----------
-----------
PER COMMON SHARE DATA: (1)
Income Before Cumulative Effect of Change in
Accounting Principle......................... $ 0.35
Cumulative Effect of Change in Accounting
Principle.................................... (0.07)
-----------
Basic Earnings................................. $ 0.28
-----------
-----------
Diluted Earnings............................... $ 0.28
Book Value..................................... 3.69
Tangible Book Value............................ 3.23
Dividends...................................... --
Actual Shares Outstanding...................... 2,503,216
Weighted Average Shares
Outstanding................................ 2,503,216
Diluted Weighted Average Shares
Outstanding................................ 2,549,122
BALANCE SHEET DATA:
Assets......................................... $ 149,561
Total Loans, net............................... 65,010
Total Deposits................................. 136,870
Long-Term Debt................................. 2,000
Short-Term Borrowings.......................... --
Shareholders' Equity........................... 9,229
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,(2) YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE ------------------------ --------------------------------------------------
DATA) 1998 1997 1997 1996 1995 1994
- ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
SELECTED FINANCIAL RATIOS:
<S> <C> <C> <C> <C> <C> <C>
Return on Average Assets....................... 0.97% 1.16% 1.14% 1.14% 1.06% 0.81%
Return on Average Equity....................... 9.27 13.30 12.38 13.88 13.24 11.28
Dividend Payout................................ 34.88 18.52 20.29 16.54 16.07 8.70
Efficiency (3)................................. 65.78 60.90 61.30 62.02 62.64 68.83
Net Interest Margin (4)........................ 4.47 4.53 4.52 4.59 4.30 3.79
Net Interest Spread (5)........................ 3.79 3.94 3.90 4.03 3.76 3.43
CAPITAL RATIOS:
Tier 1 Leverage Ratio.......................... 9.92% 10.13% 10.20% 7.25% 7.87% 7.56%
Risk-Based Capital
Tier 1....................................... 16.58 17.30 17.70 12.60 13.70 14.00
Total........................................ 17.51 18.24 18.67 13.58 14.90 15.30
Average Equity to Average Assets............... 10.51 8.70 9.22 8.24 7.99 7.18
ASSET QUALITY RATIOS:
Net Charge-offs to Average Loans............... 0.23% 0.21% 0.22% 0.22% 0.12% 0.20%
Allowance to Period End Loans.................. 0.91 0.93 0.94 0.94 0.92 0.96
Allowance for Loan Losses to Nonperforming
Loans........................................ 145.37 111.17 124.27 441.77 178.15 96.73
Nonperforming Assets to Total Assets........... 0.61 0.53 0.56 0.16 0.37 0.54
OTHER DATA:
Banking Locations.............................. 11 11 11 10 7 7
Full-time Equivalent Employees................. 151 141 144 134 95 87
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE
DATA) 1993
- ----------------------------------------------- -----------
SELECTED FINANCIAL RATIOS:
<S> <C>
Return on Average Assets....................... 0.67%
Return on Average Equity....................... 8.09
Dividend Payout................................ --
Efficiency (3)................................. 71.07
Net Interest Margin (4)........................ 4.35
Net Interest Spread (5)........................ 3.95
CAPITAL RATIOS:
Tier 1 Leverage Ratio.......................... 5.89%
Risk-Based Capital
Tier 1....................................... 12.40
Total........................................ 13.90
Average Equity to Average Assets............... 8.27
ASSET QUALITY RATIOS:
Net Charge-offs to Average Loans............... 0.09%
Allowance to Period End Loans.................. 1.05
Allowance for Loan Losses to Nonperforming
Loans........................................ 204.14
Nonperforming Assets to Total Assets........... 0.33
OTHER DATA:
Banking Locations.............................. 6
Full-time Equivalent Employees................. 73
</TABLE>
- ------------------------------
(1) Per share data figures reflect the two-for-one stock split effective August
17, 1998. Share information has been adjusted for years 1993 and 1994 to
account for the exchange ratio used in the merger with Bradford Bankshares,
Inc. Each share of common stock of the previous CNB, Inc. was converted into
1.5384 shares of stock in the continuing company effective April 1, 1994.
Prior to this adjustment, earnings per share for 1993 and 1994 were $0.43
and $0.46, respectively.
(2) Ratios, where appropriate, are presented on an annualized basis.
(3) Efficiency ratio is noninterest expense divided by the sum of net interest
income and noninterest income.
(4) Net interest margin is net interest income divided by total average earning
assets.
(5) Net interest spread is the difference between the average yield on average
earning assets and the average yield on average interest bearing
liabilities.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS COVERS IMPORTANT FACTORS
AFFECTING THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY FOR
THE PERIODS SHOWN. THE COMPANY'S FINANCIAL STATEMENTS SHOULD BE READ IN
CONJUNCTION WITH THIS ANALYSIS.
OVERVIEW
The Company is a one-bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). The Company, which commenced
operations in 1987 by acquiring the capital stock of the Bank, provides
traditional deposit and lending products and services to its commercial and
retail customers through eleven full service branches located within six
contiguous counties in Northeast Florida (Columbia, Suwannee, Baker, Bradford,
Union and Alachua Counties). The Bank is a national banking association and is
subject to the supervision of the Office of the Comptroller of the Currency (the
"Comptroller"). At September 30, 1998, the Company had total assets of $290.6
million, total loans of $176.6 million, total deposits of $249.2 million, and
total shareholders' equity of $30.6 million, representing five year compound
annual growth rates of 24.2%, 23.1%, 23.1% and 27.7%, respectively. Net income
for the nine months ended September 30, 1998 and for the year ended December 31,
1997, was $2.1 million and $3.0 million, respectively, as compared with $2.2
million and $2.3 million for the nine months ended September 30, 1997 and for
the year ended December 31, 1996, respectively. For the five years ended
December 31, 1997, the compound annual earnings growth rate was 43.1%.
The Company plans to place greater emphasis on originating commercial and
commercial real estate loans for its portfolio. In addition, the Company is
focused on the production of residential mortgage loans with the expectation of
improving non-interest income, which should occur when the loans are sold into
the secondary market. On September 30, 1998 the Company had a loan to deposit
ratio of 70.9%, compared to 69.0% on December 31, 1997. Emphasis will be placed
on increasing the loan to deposit ratio and adjusting the loan mix to include
higher yielding products.
During the second quarter of 1998, the Company started hiring additional
personnel to support planned expansion into Jacksonville and Gainesville. New
positions of a Bank President, three Division Presidents, along with additional
lending positions have been created. Additionally, a new Chief Financial Officer
was hired in the fourth quarter of 1998. Additional personnel will be required
throughout 1999. These additions have had a negative impact on 1998 earnings and
are expected to continue to negatively impact future earnings until sufficient
additional net interest income, fee income, deposits and loan growth have been
generated.
For the year ended December 31, 1997, personnel cost was $4.0 million, or
1.52% of average assets, compared to $3.1 million, or 1.54%, for the year ended
December 31, 1996. Management expects personnel cost on an annualized basis for
the fourth quarter ending December 31, 1998, to increase approximately $1.1
million to $5.1 million, or 1.70% of average assets for the year ended December
31, 1998. The expenses associated with expansion will negatively impact earnings
until and unless the Company's projected growth increases revenues.
RESULTS OF OPERATIONS
NET INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's net income for the nine months ended September 30, 1998 was
$2.1 million or $0.42 per diluted share, compared to net income of $2.2 million
or $0.53 per diluted 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. Profitability for the nine months ended September 30,
1998, compared to the nine months ended 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 addition of
staffing and infrastructure to support the Company's expansion plans. The
Company earned $638,000 for
19
<PAGE>
the three months ended September 30, 1998, a decrease from $814,000 for the
comparable period in 1997. Diluted earnings per share decreased from $0.17 to
$0.13 per share for the same period, due to the factors mentioned above.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
In 1997, the Company achieved record earnings of $3.0 million, or $0.68 per
diluted share and exceeded 1996 earnings of $2.3 million, or $0.65 per diluted
share, by $662,000, or 28.6%. Fiscal year end 1997 earnings also produced a
return on average assets of 1.14% and a return on average stockholders' equity
of 12.38%, compared to 1.14% and 13.88%, respectively, for 1996. Average return
on shareholders' equity was impacted by the issuance of additional stock to
existing shareholders under the Rights Offering. Improved earnings are mainly
attributable to a 26.9% increase in net interest income, to $10.8 million from
$8.5 million in 1996.
NET INTEREST INCOME/MARGIN
Net interest income is the single largest source of revenue of the Company
and consists of interest and fee income generated by earning assets, less
interest expense.
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
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 the same period ending September 30, 1997. This increase
was primarily in interest and fees on loans primarily as a result of growth in
the portfolio. 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
ending September 30, 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. The basis for the increase is consistent with the factors mentioned
previously.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net interest income increased by 26.9% to $10.8 million in 1997, from $8.5
million in 1996. The increase is a result of growth in loan income of $3.4
million and interest income on investments of $1.0 million, offset by an
increase in interest expense on deposits of $1.8 million and $250,000 in
borrowings. Total average assets grew by 28.8%, as the Company maintained the
same ratio of average earning assets to total average assets. The total average
loan portfolio, which is the largest and highest yielding component of net
interest income, increased $37.7 million to $155.2 million from $117.5 million,
or 32.1%, from 1996.
Net interest margins decreased to 4.52% in 1997 from 4.59% in 1996. The 1997
average rate on earning assets decreased one basis point to 8.15%, while the
average rate on interest-bearing liabilities climbed twelve basis points to
4.25%. Average time deposits for 1997 represented 52.6% of total average
deposits, compared to 51.5% a year earlier.
20
<PAGE>
AVERAGE BALANCES--YIELDS AND RATES
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------------------- ----------------------
1998 1997 1997
--------------------------------- --------------------------------- ----------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR
BALANCE EXPENSE RATE (1) BALANCE EXPENSE RATE (1) BALANCE EXPENSE
--------- --------- ----------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Federal Funds Sold.................... $ 29,407 $ 1,189 5.41% $ 11,056 $ 437 5.28% $ 13,480 $ 720
Securities Available for Sale......... 49,286 2,253 6.11 60,572 2,755 6.08 58,442 3,560
Securities Held to Maturity........... 7,108 271 5.10 9,403 378 5.37 9,160 490
Loans, Net Unearned (2)............... 167,760 11,711 9.33 154,006 10,799 9.38 155,168 14,542
Interest Bearing Deposits............. 5,826 242 5.55 683 31 6.06 1,946 108
--------- --------- ----- --------- --------- --- --------- -----------
TOTAL EARNING ASSETS.................. 259,387 15,666 8.07 235,720 14,400 8.17 238,196 19,420
All Other Assets...................... 24,159 22,515 22,508
--------- --------- ---------
TOTAL ASSETS.......................... $ 283,546 $ 258,235 $ 260,704
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW & Money Markets................. $ 67,931 1,276 2.51 $ 62,359 1,161 2.49 $ 62,465 1,555
Savings............................. 16,246 237 1.95 15,107 221 1.96 15,146 296
Time Deposits....................... 127,272 5,211 5.47 118,484 4,719 5.33 119,545 6,404
Short Term Borrowings................. 6,844 261 5.10 4,743 179 5.05 4,738 239
Notes Payable & Debentures............ 113 7 8.00 2,250 136 8.08 2,100 169
--------- --------- ----- --------- --------- --- --------- -----------
TOTAL INTEREST BEARING LIABILITIES.... 218,406 6,992 4.28 202,943 6,416 4.23 203,994 8,663
Demand Deposits....................... 32,453 30,459 30,246
Other Liabilities..................... 2,881 2,360 2,434
Shareholders' Equity.................. 29,806 22,473 24,030
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................. $ 283,546 $ 258,235 $ 260,704
--------- --------- ---------
--------- --------- ---------
NET INTEREST SPREAD (3)............... 3.79% 3.94%
----- ---
----- ---
NET INTEREST INCOME................... $ 8,674 $ 7,984 $ 10,757
--------- --------- -----------
--------- --------- -----------
NET INTEREST MARGIN (4)............... 4.47% 4.53%
----- ---
----- ---
<CAPTION>
1996 1995
----------------------------------- -----------------------------------
INTEREST INTEREST
AVERAGE AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE
RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal Funds Sold.................... $ 5.34% $ 11,781 $ 613 5.20% $ 7,490 $ 436 5.82%
Securities Available for Sale......... 6.09 43,180 2,615 6.06 16,246 837 5.15
Securities Held to Maturity........... 5.35 12,135 654 5.39 40,180 2,291 5.70
Loans, Net Unearned (2)............... 9.37 117,450 11,188 9.53 93,454 9,161 9.80
Interest Bearing Deposits............. 5.55 352 20 5.68 355 20 5.64
----- --------- ----------- --- --------- ----------- ---
TOTAL EARNING ASSETS.................. 8.15 184,898 15,090 8.16 157,725 12,745 8.08
All Other Assets...................... 17,434 16,253
--------- ---------
TOTAL ASSETS.......................... $ 202,332 $ 173,978
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW & Money Markets................. 2.49 $ 50,945 1,330 2.61 $ 41,219 1,041 2.52
Savings............................. 1.95 13,466 277 2.06 12,283 320 2.61
Time Deposits....................... 5.36 93,481 4,847 5.19 82,999 4,444 5.35
Short Term Borrowings................. 5.04 520 25 4.81
Notes Payable & Debentures............ 8.05 1,511 133 8.80 1,623 161 9.92
----- --------- ----------- --- --------- ----------- ---
TOTAL INTEREST BEARING LIABILITIES.... 4.25 159,923 6,612 4.13 138,124 5,966 4.32
Demand Deposits....................... 23,701 18,406
Other Liabilities..................... 2,041 3,541
Shareholders' Equity.................. 16,667 13,907
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................. $ 202,332 $ 173,978
--------- ---------
--------- ---------
NET INTEREST SPREAD (3)............... 3.90% 4.03% 3.76%
----- --- ---
----- --- ---
NET INTEREST INCOME................... $ 8,478 $ 6,779
----------- -----------
----------- -----------
NET INTEREST MARGIN (4)............... 4.52% 4.59% 4.30%
----- --- ---
----- --- ---
</TABLE>
- ------------------------------
(1) Nine month data presented on an annualized basis.
(2) Interest income on average loans includes loan fee recognition of $410,000
and $402,000 in 1998 and 1997, respectively.
(3) Represents the average rate earned on interest earning assets minus average
rate paid on interest bearing liabilities.
(4) Represents net interest income divided by total earnings assets.
(5) Yields are calculated using stated rates, rather than tax equivalent rates.
21
<PAGE>
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(UNAUDITED)
<TABLE>
<CAPTION>
NET CHANGE
DECEMBER
31,
1996-1997
NET CHANGE SEPTEMBER 30, ATTRIBUTABLE
1997-1998 ATTRIBUTABLE TO: TO:
----------------------------------------- -----------
NET
VOLUME (1) RATE (2) CHANGE VOLUME (1)
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
(THOUSANDS)
INTEREST INCOME:
Federal Funds Sold................................................. $ 725 $ 27 $ 752 $ 88
Securities Available for Sale...................................... (513) 11 (502) 926
Securities Held to Maturity........................................ (93) (14) (107) (160)
Loans.............................................................. 971 (59) 912 3,600
Interest Bearing Deposits.......................................... 233 (22) 211 90
----- ----- ----- -----------
Total............................................................ 1,323 (57) 1,266 4,544
----- ----- ----- -----------
INTEREST EXPENSE:
Deposits:
NOW & Money Markets................................................ 104 11 115 300
Savings............................................................ 17 (1) 16 35
Time Deposits...................................................... 355 137 492 1,357
Short Term Borrowings................................................ 80 2 82 213
Notes & Payable Debentures........................................... (129) -- (129) 52
----- ----- ----- -----------
Total............................................................ 427 149 576 1,957
----- ----- ----- -----------
Net Interest Income............................................ $ 896 $ (206) $ 690 $ 2,587
----- ----- ----- -----------
----- ----- ----- -----------
<CAPTION>
NET CHANGE DECEMBER 31,
1995-1996 ATTRIBUTABLE
TO:
------------------------
NET
RATE (2) CHANGE VOLUME (1) RATE (2)
----------- ----------- ----------- -----------
<S> <C>
(THOUSANDS)
INTEREST INCOME:
Federal Funds Sold................................................. $ 19 $ 107 $ 249 $ (72)
Securities Available for Sale...................................... 19 945 1,387 391
Securities Held to Maturity........................................ (4) (164) (1,599) (38)
Loans.............................................................. (246) 3,354 2,349 (322)
Interest Bearing Deposits.......................................... (2) 88 -- --
----- ----------- ----------- -----
Total............................................................ (214) 4,330 2,386 (41)
----- ----------- ----------- -----
INTEREST EXPENSE:
Deposits:
NOW & Money Markets................................................ (75) 225 243 46
Savings............................................................ (16) 19 32 (75)
Time Deposits...................................................... 200 1,557 557 (154)
Short Term Borrowings................................................ 1 214 25 --
Notes & Payable Debentures........................................... (16) 36 (10) (18)
----- ----------- ----------- -----
Total............................................................ 94 2,051 847 (201)
----- ----------- ----------- -----
Net Interest Income............................................ $ (308) $ 2,279 $ 1,539 $ 160
----- ----------- ----------- -----
----- ----------- ----------- -----
<CAPTION>
NET
CHANGE
-----------
(THOUSANDS)
INTEREST INCOME:
Federal Funds Sold................................................. $ 177
Securities Available for Sale...................................... 1,778
Securities Held to Maturity........................................ (1,637)
Loans.............................................................. 2,027
Interest Bearing Deposits.......................................... --
-----------
Total............................................................ 2,345
-----------
INTEREST EXPENSE:
Deposits:
NOW & Money Markets................................................ 289
Savings............................................................ (43)
Time Deposits...................................................... 403
Short Term Borrowings................................................ 25
Notes & Payable Debentures........................................... (28)
-----------
Total............................................................ 646
-----------
Net Interest Income............................................ $ 1,699
-----------
-----------
</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.
22
<PAGE>
PROVISION FOR LOAN LOSSES
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 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 those levels maintained by other peer banks,
conditions of individual borrowers, the Company's historical loan loss
experience and the general economic environment, 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 nine month 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 142.8% to $170,000 as compared to $70,000 for the same
period in 1997. The increase is due mainly to the Company's budgeted increase
for the allowance for loan losses. The provision for loan losses on December 31,
1997, increased by $105,000 to $440,000, or 31.3%, from $335,000 on December
31,1996, in direct correlation to the higher average loans outstanding.
ACTIVITY IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Year............. $ 1,495 $ 1,396 $ 1,396 $ 946 $ 827 $ 690 $ 572
Allowance Acquired in Merger............. -- -- -- 370 -- 169 --
Loans Charged-Off:
Commercial, Financial and
Agricultural......................... 121 115 160 79 11 38 34
Real Estate, Mortgage.................. 3 -- -- 1 -- 22 --
Consumer............................... 237 171 248 203 159 122 55
---------- ---------- ---------- ---------- ---------- --------- ---------
Total Loans Charged-Off.............. (361) (286) (408) (283) (170) (182) (89)
Recoveries on Loans Previously
Charged-Off:
Commercial, Financial and
Agricultural......................... 33 11 24 7 17 4 8
Real Estate Mortgage................... 7 -- -- 1 -- 11 --
Consumer............................... 28 32 43 20 42 10 26
---------- ---------- ---------- ---------- ---------- --------- ---------
Total Loan Recoveries................ 68 43 67 28 59 25 34
---------- ---------- ---------- ---------- ---------- --------- ---------
Net Loans Charged-Off.............. (293) (243) (341) (255) (111) (157) (55)
---------- ---------- ---------- ---------- ---------- --------- ---------
Provision for Loan Losses Charged to
Expense................................ 400 330 440 335 230 125 173
---------- ---------- ---------- ---------- ---------- --------- ---------
Ending Balance........................... $ 1,602 $ 1,483 $ 1,495 $ 1,396 $ 946 $ 827 $ 690
---------- ---------- ---------- ---------- ---------- --------- ---------
---------- ---------- ---------- ---------- ---------- --------- ---------
Total Loans Outstanding.................. $ 176,622 $ 158,651 $ 159,649 $ 148,824 $ 102,349 $ 86,047 $ 65,700
Average Loans Outstanding................ $ 167,760 $ 154,006 $ 155,168 $ 117,450 $ 93,454 $ 78,817 $ 58,979
Allowance for Loan Losses to Loans
Outstanding............................ 0.91% 0.93% 0.94% 0.94% 0.92% 0.96% 1.05%
Net Charge-Offs to Average Loans
Outstanding (annualized)............... 0.23% 0.21% 0.22% 0.22% 0.12% 0.20% 0.09%
</TABLE>
23
<PAGE>
NON-INTEREST INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Non-interest income for the nine months ended September 30, 1998, was $1.7
million, an increase of $97,000, or 5.9%, 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.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Non-interest income for December 31, 1997, increased by 21.2% to $2.2
million from $1.8 million in 1996. This increase was substantially the result of
increased assets and deposits. Service charges on deposit accounts increased to
$1.7 million from $1.4 million, an increase of 23.4% from 1996. Other fee
income, which includes credit card fees, credit life income, safe deposit box
fees, net gains and losses from the sale of securities and other miscellaneous
fees increased $47,000, or 12.8%.
NON-INTEREST EXPENSE
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Non-interest expense increased $987,000 for the nine months ended September
30, 1998, or 16.9%, 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 the
Jacksonville and Gainesville markets. The plan involved hiring a Bank President,
three Division Presidents and several other key positions. Full time equivalent
employees were up 7.1% to 151 at September 30, 1998, compared to 141 at
September 30, 1997. For the nine months ended September 30, 1998, occupancy and
equipment expenses increased $175,000, or 17.1%, to $1.2 million, compared to
the same period 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 in August 1997. Other
operating expenses increased $256,000, or 13.7%, at September 30, 1998, compared
to September 30, 1997. One of the main contributing factors 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 table, "Other Operating
Expenses" present major categories of other operating expenses, with comparisons
to previous periods.
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.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Non-interest expense for the year ended December 31, 1997, increased by $1.6
million, or 24.4%, as compared to December 31, 1996. Salaries and employee
benefits increased $844,000, or 27.1%, from 1996. The increase in salary and
employee expense is mainly attributable to expenses associated with the
acquisition of Riherd Bank Holding Company, which expenses were included for the
full year of 1997 as compared to only four months in 1996. Also adding to the
increase were the salary expenses associated with the West 90 Office opening in
August 1997 and several key positions that were filled late in the fourth
quarter of 1997. Occupancy and equipment expenses increased from $1.0 million to
$1.4 million, or 42.1%. Fixed assets relating to the merger between the Bank and
Farmers and Dealers Bank (the wholly-owned subsidiary of Riherd Bank Holding
Company), which occurred late in the third quarter of 1996, added approximately
$215,000 to the occupancy expenses in 1997. The opening of an operations center,
which houses the Company's item processing and check imaging systems, late in
the fourth quarter of 1996, and
24
<PAGE>
the opening of the West 90 Office in the third quarter of 1997, also contributed
to the increase in occupancy and equipment expenses. Other operating expense
increased $300,000, or 13.2%, in 1997 as compared to 1996. The increase is
mainly attributable to a 74.2% increase in additional data processing costs of
$221,000, which resulted when the Company renewed, at prevailing market rates, a
data processing service contract that expired in late 1996. Also contributing to
the increase were operating expenses related to the additional offices and
imaging supplies.
OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1998 1997 1997 1996
--------- --------- --------- ---------
<CAPTION>
(THOUSANDS)
<S> <C> <C> <C> <C>
Special one time Savings Association Insurance Fund Assessment............. -- -- -- $ 327
Data processing............................................................ $ 404 $ 387 $ 519 298
Postage and delivery....................................................... 275 249 336 219
Other...................................................................... 249 160 322 267
Advertising and Promotion.................................................. 239 218 257 237
Telephone.................................................................. 196 128 185 105
Supplies................................................................... 178 187 231 133
Legal and professional..................................................... 155 118 158 134
Amortization of intangible assets.......................................... 143 151 202 158
Regulatory fees............................................................ 100 86 119 176
Loan and collection expenses............................................... 99 112 135 120
Administrative............................................................. 90 76 103 92
--------- --------- --------- ---------
Total other operating expenses............................................. $ 2,128 $ 1,872 $ 2,567 $ 2,266
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
INCOME TAX PROVISION
The Company's income tax expenses in interim reporting periods are
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. The income tax provision for the year ended
December 31, 1997, was $1.6 million, an effective tax rate of 34.7%, as compared
to $1.2 million, or an effective tax rate of 35.0%, for the year ended 1996.
FINANCIAL CONDITION
As of September 30, 1998, the Company had total assets of $290.6 million,
compared to $273.3 and $255.0 million for years ended December 31, 1997, and
1996, respectively. Net loans outstanding on September 30, 1998, were $175.0
million, compared to $158.2 million and $147.4 million for years ended December
31, 1997, and 1996, respectively. Net income for the years ended December 31,
1997, and 1996 was $3.0 million and $2.3 million, respectively, and $2.1 million
and $2.2 million for the nine months ended September 30, 1998 and 1997,
respectively.
LOANS
Lending related income is the most important component of the Company's net
interest income and is the key to profitability. The loan portfolio is the
largest component 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).
25
<PAGE>
Average loans during the nine-month period ending September 30, 1998, were
$167.8 million, or 64.7%, of earning assets as compared to $155.2 million, or
65.1%, of earning assets for December 31, 1997, and $117.5 million, or 63.5%, of
earning assets for December 31, 1996. This represented an average loan to
average deposit ratio of 68.8%, 68.2% and 64.7% for September 30, 1998, December
31, 1997, and December 31, 1996, 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 $159.6 million at December 31, 1997, an
increase of $17.0 million, or 10.6%. The growth in loans in the nine-month
period was mainly due to a $9.4 million, or 13.6%, increase in commercial,
financial and agricultural loans. Commercial, financial and agricultural loans,
which include loans secured by owner-occupied commercial real estate, totalled
$78.6 million, or 45% of the loan portfolio. Real estate construction loans
totalled $5.8 million, or 3% of the loan portfolio. Real estate mortgage loans
totalled $72.0 million, or 41% of the loan portfolio. Installment and consumer
loans, which include credit card balances of approximately $1.4 million,
totalled $20.2 million, or 11% of the loan portfolio.
As of December 31, 1997, the Company had total loans of $159.6 million, net
of unearned discount, as compared to $148.8 million at December 31, 1996, an
increase of $10.8 million, or 7.3%. The growth was mainly due to an $11.8
million, or 20.7%, increase in real estate mortgage loans. Commercial, financial
and agricultural loans, which include loans secured by owner-occupied commercial
real estate, totalled $69.2 million, or 43% of the loan portfolio. Real estate
construction loans totalled $3.3 million, or 2% of the loan portfolio. Real
estate mortgage loans primarily consisted of single family residential mortgages
and totaled $68.6 million, or 43% of the loan portfolio. Installment and
consumer loans, which include credit card balances of approximately $1.4
million, totalled $18.5 million, or 12% of the loan portfolio.
Loan concentrations are considered to exist where there are amounts loaned
to multiple borrowers engaged in similar activities which collectively would be
similarly impacted by economic or other conditions and when the total of such
amounts would exceed 25% of total capital. Due to the lack of diversified
industry and the relative proximity of the markets served, the Company has
concentrations in geographic as well as in types of loans funded.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- --------------------------------------------------------
TYPES OF LOANS 1998 1997 1996 1995 1994 1993
- ----------------------------------------------- ------------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(THOUSANDS)
Commercial, Financial and Agricultural......... $ 78,643 $ 69,238 $ 68,595 $ 48,948 $ 37,165 $ 28,634
Real Estate--Construction...................... 5,801 3,336 4,029 2,158 1,701 867
Real Estate--Mortgage.......................... 71,966 68,561 56,787 34,912 32,914 26,785
Installment and Consumer Lines................. 20,212 18,514 19,413 16,331 14,267 9,414
------------- ---------- ---------- ---------- --------- ---------
Total Loans, Net of Unearned Discount.......... 176,622 159,649 148,824 102,349 86,047 65,700
Less: Allowance for Loan Losses................ (1,602) (1,495) (1,396) (946) (827) (690)
------------- ---------- ---------- ---------- --------- ---------
Net Loans...................................... $ 175,020 $ 158,154 $ 147,428 $ 101,403 $ 85,220 $ 65,010
------------- ---------- ---------- ---------- --------- ---------
------------- ---------- ---------- ---------- --------- ---------
</TABLE>
26
<PAGE>
LOAN MATURITY SCHEDULE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------
<S> <C> <C> <C> <C>
0-12 1-5 OVER 5
MONTHS YEARS YEARS TOTAL
--------- --------- --------- ----------
<CAPTION>
(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>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------
<S> <C> <C> <C> <C>
0-12 1-5 OVER 5
MONTHS YEARS YEARS TOTAL
--------- --------- --------- ----------
<CAPTION>
(THOUSANDS)
<S> <C> <C> <C> <C>
All Loans Other Than Construction.................................... $ 16,387 $ 60,134 $ 79,792 $ 156,313
Real Estate--Construction............................................ 3,336 -- -- 3,336
--------- --------- --------- ----------
Total................................................................ $ 19,723 $ 60,134 $ 79,792 $ 159,649
--------- --------- --------- ----------
--------- --------- --------- ----------
Fixed Interest Rate.................................................. $ 10,608 $ 38,191 $ 22,132 $ 70,931
Variable Interest Rate............................................... $ 9,115 $ 21,943 $ 57,660 $ 88,718
</TABLE>
CREDIT QUALITY
The Company maintains a reserve for loan losses to absorb inherent losses in
the loan portfolio. The loans are charged against the allowance when management
believes collection of the principal is unlikely. The reserve consists of
amounts established on specific loans and is based on historical loan loss
experience. The specific reserve element is based on a regular analysis of all
loans and commitments where the internal credit rating is at or below a
predetermined classification. The historical loan loss element represents a
projection of future credit problems and is determined statistically using
actual loss experience of each loan type. Management also weighs general
economic conditions based on knowledge of specific factors that may affect the
collectibility of loans. The Company is committed to the early recognition of
possible problems and to maintaining a strong reserve. At September 30, 1998,
the allowance for loan losses was $1.6 million, or 0.91% of total loans
outstanding, net of unearned income, compared to $1.5 million, or 0.94% at
December 31, 1997, and $1.4 million, or .94%, at December 31, 1996.
Non-performing assets consist of non-accrual loans, loans past due 90 days
or more and still accruing interest, and other real estate owned. Loans are
placed on a non-accrual status when they are past due 90 days and management
believes the borrower's financial condition, after giving consideration to
economic conditions and collection efforts, is such that collection of interest
is doubtful. When a loan is placed on a non-accrual status, interest accruals
cease and uncollected interest is reversed and charged against current income.
Subsequent collections reduce the principal balance of the loan until the loan
is returned to accrual status.
Total non-performing assets as of 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 totaling approximately $414,000 that is in the process of
collection. Even though non-performing assets on September 30, 1998, have
increased from September 30, 1997, overall classified assets have decreased,
causing the allowance for loan losses to remain relatively constant. The
allowance for loan losses on September 30, 1998, provides for anticipated losses
applicable to these loans.
27
<PAGE>
Total non-performing assets increased by $1.1 million to $1.5 million in
1997 from $404,000 in 1996. Despite the increase, the Company's ratio of
non-performing assets to total loans plus other real estate owned is in line
with other similar banking institutions. Non-performing assets as a percentage
of total assets increased to 0.56% in 1997 from 0.16% in 1996. Non-accrual loans
increased $958,000 since December 31, 1996. The increase in non-accrual loans
since December 31, 1996, was attributable to seven different loans acquired in
the merger with Farmers and Dealers Bank. The majority of these loans are in
litigation and the Bank is actively pursuing collection strategies. Other real
estate owned increased $232,000, which is entirely due to two commercial real
estate loans obtained in the merger. Year end loans (net of unearned discount
and the allowance for loan losses) were $158.2 million, as compared to $147.4
million in 1996, representing an increase of $10.7 million, or 7.3%.
Management is continually analyzing its loan portfolio in an effort to
recognize and resolve its problem assets as quickly and efficiently as possible.
As of September 30, 1998, management believes that it has identified and
adequately reserved for such problem assets. However, management recognizes that
many factors can adversely impact various segments of its market, creating
financial difficulties for certain borrowers. As such, management continuously
focuses its attention on promptly identifying and providing for potential
problem loans as they arise.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Accrual Loans........................ $ 849 $ 1,256 $ 1,045 $ 87 $ 372 $ 645 $ 332
Past Due Loans 90 Days or More and Still
Accruing............................... 253 78 158 229 159 210 6
Other Real Estate Owned.................. 684 76 320 88 126 62 151
--------- --------- --------- --------- --------- --------- ---------
Total Non-Performing Assets.............. $ 1,786 $ 1,410 $ 1,523 $ 404 $ 657 $ 917 $ 489
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Percent of Total Assets.................. 0.61% 0.53% 0.56% 0.16% 0.37% 0.54% 0.33%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for Loan Losses................ $ 1,602 $ 1,483 $ 1,495 $ 1,396 $ 946 $ 827 $ 690
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for Loan Losses to
Nonperforming Loans.................... 145.37% 111.17% 124.27% 441.77% 178.15% 96.73% 204.14%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER
SEPTEMBER 30, 1998 DECEMBER 31, 1997 31, 1996
---------------------------- ---------------------------- ---------
<S> <C> <C> <C> <C> <C>
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
--------- ----------------- --------- ----------------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural...... $ 947 45% $ 932 43% $ 821
Real Estate--Construction................... 7 3 9 2% 5
Real Estate--Mortgage....................... 135 41 163 43% 154
Consumer.................................... 513 11 391 12% 416
Unallocated................................. -- -- -- -- --
--------- --- --------- --- ---------
Total....................................... $ 1,602 100% $ 1,495 100% $ 1,396
--------- --- --------- --- ---------
--------- --- --------- --- ---------
<CAPTION>
<S> <C>
PERCENT OF
LOANS IN EACH
CATEGORY TO
TOTAL LOANS
-----------------
<S> <C>
Commercial, Financial and Agricultural...... 46%
Real Estate--Construction................... 3
Real Estate--Mortgage....................... 38
Consumer.................................... 13
Unallocated................................. --
---
Total....................................... 100%
---
---
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
DECEMBER
DECEMBER 31, 1995 DECEMBER 31, 1994 31, 1993
------------------------------ ------------------------------ -----------
<S> <C> <C> <C> <C> <C>
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
----------- ----------------- ----------- ----------------- -----------
Commercial, Financial and Agricultural.... $ 476 48% $ 454 43% $ 373
Real Estate--Construction................. 5 2 3 2 27
Real Estate--Mortgage..................... 72 34 56 38 69
Consumer.................................. 389 16 275 17 152
Unallocated............................... 4 -- 39 -- 69
----- --- ----- --- -----
Total..................................... $ 946 100% $ 827 100% $ 690
----- --- ----- --- -----
----- --- ----- --- -----
<CAPTION>
<S> <C>
PERCENT OF
LOANS IN EACH
CATEGORY TO
TOTAL LOANS
-----------------
Commercial, Financial and Agricultural.... 44%
Real Estate--Construction................. 1
Real Estate--Mortgage..................... 41
Consumer.................................. 14
Unallocated............................... --
---
Total..................................... 100%
---
---
</TABLE>
DEPOSITS AND FUNDS PURCHASED
Total deposits as of September 30, 1998, were $249.2 million, compared to
$231.4 million on December 31, 1997. Total deposits for the year ended December
31, 1997, increased by $4.6 million, or 2.0%, from December 31, 1996. The
Company does not rely on purchased or brokered deposits as a source of funds.
Instead, the generation of deposits within its market area serves as the
Company's fundamental tool in providing a source of funds to be invested
primarily in loans.
SELECTED STATISTICAL INFORMATION FOR DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits................... $ 32,453 -- $ 30,246 -- $ 23,701 -- $ 18,406 --
Interest-bearing demand
deposits................... 67,931 2.51% 62,465 2.49% 50,945 2.61% 41,219 2.52%
Savings deposits............. 16,246 1.95 15,146 1.95 13,466 2.06 12,283 2.61
Time deposits................ 127,272 5.47 119,545 5.36 93,481 5.19 82,999 5.35
---------- --- ---------- --- ---------- --- ---------- ---
Total average deposits... $ 243,902 3.68% $ 227,402 3.63% $ 181,593 3.56% $ 154,907 3.74%
---------- --- ---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- --- ---------- ---
</TABLE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
AMOUNT AMOUNT
------------------ -----------------
<CAPTION>
(THOUSANDS)
<S> <C> <C>
Three Months or Less....................................................... $ 8,044 $ 5,246
Three Through Six Months................................................... 6,846 6,703
Six Through Twelve Months.................................................. 13,363 8,795
Over Twelve Months......................................................... 10,441 12,412
------- -------
Total.................................................................. $ 38,694 $ 33,156
------- -------
------- -------
</TABLE>
29
<PAGE>
REPURCHASE AGREEMENTS
The Company enters into agreements to repurchase ("repurchase agreements")
under which the Company pledges investment securities owned and under its
control as collateral against the one-day agreements. The daily average balance
of these agreements for the periods ended September 30, 1998 and 1997 was
approximately $6.8 million and $4.7 million, respectively. Interest expense for
the same periods was $261,000 and $179,000, respectively, resulting in an
average rate paid of 5.10% and 5.05% for the nine-month periods ended September
30, 1998, and 1997, respectively. The daily average balance ended December 31,
1997, and 1996 was approximately $4.7 million and $520,000, respectively.
Interest expense for these periods was $238,000 and $25,000, respectively,
resulting in an average rate paid of 5.04% and 4.81% for the years ended 1997
and 1996, respectively.
SCHEDULE OF SHORT-TERM BORROWINGS(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAXIMUM WEIGHTED
OUTSTANDING AVERAGE AVERAGE
AT ANY AVERAGE INTEREST RATE ENDING INTEREST RATE
MONTH-END BALANCE DURING YEAR BALANCE AT YEAR-END
----------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
September 30, 1998.................................. $ 8,042 $ 6,844 5.10% $ 7,635 4.99%
September 30, 1997.................................. 6,164 4,743 5.05 4,172 5.15
YEAR ENDED DECEMBER 31,
1997................................................ 9,157 4,738 5.04 9,157 5.02
1996................................................ 5,035 520 4.81 3,766 4.80
1995................................................ -- -- -- -- --
</TABLE>
- ------------------------
(1) Consists of securities sold under agreements to repurchase.
NOTES PAYABLE
The Company borrowed $2.7 million in connection with the acquisition of
Riherd Bank Holding Company in the third quarter of 1996. Total notes
outstanding on December 31, 1997, was $1.5 million, compared to $2.7 million for
the same period in 1996. The Company voluntarily accelerated principal payments
and paid in full its note payable on January 22, 1998. On September 30, 1998,
the Company had no notes payable outstanding.
The Company maintains lines of credit with certain financial institutions
totaling $4.0 million. There were no amounts outstanding as of September 30,
1998 or December 31, 1997.
SECURITIES
The Company uses its securities portfolio primarily as a source of liquidity
and a base from which to pledge assets for repurchase agreements and public
deposits. Total recorded value of securities was $48.3 million at September 30,
1998, $60.9 million at December 31, 1997, and $70.9 million at December 31,
1996. 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 that a portion of its
investment portfolio matures 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 composition of the portfolio offers management full
flexibility in managing its liquidity position and interest rate sensitivity,
without adversely impacting its regulatory capital levels. The investment
securities available-for-sale are carried at fair market value and had a net
unrealized gain, net of taxes, on December 31, 1997, of approximately $255,000,
as compared to $66,000 on December 31, 1996, and $447,000 on September 30, 1998.
30
<PAGE>
The Company invests primarily in direct obligations of the United States,
obligations guaranteed as to the principal and interest by the United States and
obligations of agencies of the United States. In addition, the Company enters
into federal funds transactions with its principal correspondent banks, and acts
as a net seller of such funds. The Federal Reserve Bank and the Federal Home
Loan Bank also require equity investments to be maintained by the Company.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
(THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
AVAILABLE-FOR-SALE COST MARKET VALUE COST MARKET VALUE COST MARKET VALUE
- ------------------------------------------- ----------- ------------ ----------- ------------ ----------- ------------
U.S. Treasury and U.S. Government Agencies
and Corporations and Obligations of State
and Political Subdivisions:
One Year or Less....................... $ 17,850 $ 17,915 $ 14,500 $ 14,514 $ 13,074 $ 13,029
Over One Through Five Years............ 16,972 17,441 25,207 25,486 32,183 32,272
Over Five Through Ten Years............ 100 105 2,714 2,744 2,724 2,752
Over Ten Years......................... 608 654 608 647 857 910
Mortgage-Backed and Other Securities....... 6,474 6,602 9,407 9,452 11,923 11,903
----------- ------------ ----------- ------------ ----------- ------------
Total.............................. $ 42,004 $ 42,717 $ 52,436 $ 52,843 $ 60,761 $ 60,866
----------- ------------ ----------- ------------ ----------- ------------
----------- ------------ ----------- ------------ ----------- ------------
HELD-TO-MATURITY
Mortgage-Backed and Other Securities....... $ 5,597 $ 5,588 $ 8,096 $ 7,936 $ 10,009 $ 9,722
----------- ------------ ----------- ------------ ----------- ------------
Total.............................. $ 5,597 $ 5,588 $ 8,096 $ 7,936 $ 10,009 $ 9,722
----------- ------------ ----------- ------------ ----------- ------------
----------- ------------ ----------- ------------ ----------- ------------
</TABLE>
WEIGHTED AVERAGE YIELD BY RANGE OF MATURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
One Year or Less....................................... 5.67% 5.63% 5.24%
Over One through Five Years............................ 6.17 5.93 6.09
Over Five through Ten Years............................ 5.94 6.78 6.43
Over Ten Years (1)..................................... 6.22 6.53 6.14
</TABLE>
- ------------------------
(1) Represents adjustable rate mortgage-backed securities which are repriceable
within one year.
DISTRIBUTION OF INVESTMENT SECURITIES
(THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ----------------------
<CAPTION>
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.......... $ 20,463 $ 20,934 $ 26,947 $ 27,219 $ 32,014 $ 32,111 $ 13,701 $ 13,633
U.S. Government Agencies.......... 13,486 13,525 14,667 14,684 15,159 15,087 16,161 16,270
State, County, & Municipal........ 1,581 1,656 1,415 1,488 1,663 1,763 0 0
Mortgage-Backed Securities........ 10,628 10,665 16,115 16,000 20,724 20,423 22,296 22,048
Other investments................. 1,443 1,525 1,388 1,388 1,210 1,204 948 940
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total............................. $ 47,601 $ 48,305 $ 60,532 $ 60,779 $ 70,770 $ 70,588 $ 53,106 $ 52,891
----------- --------- ----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- --------- ----------- ---------
</TABLE>
31
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
Market and public confidence in the financial strength of the Company and
financial institutions in general will largely determine the Company's access to
appropriate levels of liquidity. This confidence is significantly dependent on
the Company's ability to maintain sound asset quality and appropriate levels of
capital resources.
Liquidity is defined as the ability of the Company to meet anticipated
customer demands for funds under credit commitments and deposit withdrawals at a
reasonable cost and on a timely basis. Management measures the Company's
liquidity position by giving consideration to both on- and off-balance sheet
sources of and demands for funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for pledging to secure borrowings from dealers and customers
pursuant to securities sold under repurchase agreements; loan repayments; loan
sales; deposits and certain interest rate-sensitive deposits; and borrowings
under overnight federal fund lines available from correspondent banks. In
addition to interest rate-sensitive deposits, the Company's primary demand for
liquidity is anticipated fundings under credit commitments to customers.
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 instruments 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.
The asset mix of the balance sheet is evaluated continually in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity. Management of the liability mix of the balance sheet focuses on
expanding the various funding sources.
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.
On January 28, 1997, the Commission adopted amendments to Regulation S-K,
Regulation S-X, and various forms (Securities Act Release No. 7386) to clarify
and expand existing requirements for disclosures about derivatives and market
risks inherent in derivatives and other financial instruments. No derivative
financial instruments are held by the Company, but other financial instruments,
which include investments, loans and deposit liabilities, are included in the
Company's balance sheet. The release requires quantitative and qualitative
disclosures about market risk.
The Company has prepared a table which will enhance the presentation of
market risk associated with financial instruments held by the Company. In the
"Rate Sensitivity Analysis" table, 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 December 31, 1997, and September 30, 1998, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. The estimated fair
values at December 31, 1997, and September 30, 1998, should not necessarily be
considered to apply at subsequent dates.
32
<PAGE>
RATE SENSITIVITY ANALYSIS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
FAIR
(DOLLARS IN THOUSANDS) 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 Investments........ -- -- -- -- -- 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 (3)............................ $ 12,558 -- -- -- -- $ 29,304 $ 41,862 $ 41,862
Average Interest Rate.......... 1.63% 1.63% 1.63%
Money Market (4)................... 24,000 -- -- -- -- 2,363 26,363 26,363
Average Interest Rate.......... 3.87% 1.74% 3.68%
Savings (3)........................ 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.
(3) Thirty percent of all NOW and Savings accounts have been designated as
maturing within one year.
(4) All Money Market accounts $25,000 and over and 30% of Money Market accounts
under $25,000 have been designated as maturing within one year.
33
<PAGE>
RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FAIR
(DOLLARS IN THOUSANDS) 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................. $ 10,608 $ 6,091 $ 10,378 $ 11,820 $ 9,902 $ 22,132 $ 70,931 $ 71,120
Average Interest Rate.......... 8.96% 10.88% 9.97% 9.18% 9.09% 8.57% 9.21%
Variable Rate Loans.............. 9,115 4,757 8,376 4,762 4,048 57,660 88,718 88,718
Average Interest Rate.......... 9.91% 10.16% 9.34% 9.08% 9.42% 8.38% 8.81%
Investment Securities(1)
Fixed Rate Investments........... 17,702 10,153 8,462 8,120 3,000 6,640 54,077 54,267
Average Interest Rate.......... 5.66% 5.99% 5.89% 6.50% 6.89% 6.17% 6.01%
Variable Rate Investments........ 500 -- -- -- -- 4,567 5,067 5,124
Average Interest Rate.......... 4.56% 6.95% 6.71%
Federal Funds Sold................. 24,125 -- -- -- -- -- 24,125 24,125
Average Interest Rate.......... 5.50% 5.50%
Other Earning Assets(2)............ 7,124 -- -- -- -- -- 7,124 7,124
Average Interest Rate.......... 5.77% 5.77%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Interest-Earning
Assets........................... $ 69,174 $ 21,001 $ 27,216 $ 24,702 $ 16,950 $ 90,999 $ 250,042 $ 250,478
Average Interest Rate.......... 6.67% 8.35% 8.51% 8.28% 8.78% 8.19% 7.87%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
NOW (3)............................ $ 11,769 -- -- -- -- $ 26,782 $ 38,551 $ 38,551
Average Interest Rate.......... 1.80% 1.80% 1.80%
Money Market (4)................... 21,672 -- -- -- -- 2,862 24,534 24,534
Average Interest Rate.......... 4.08% 2.14% 3.85%
Savings (3)........................ 4,363 -- -- -- -- 10,860 15,223 15,223
Average Interest Rate.......... 1.98% 1.98% 1.98%
CD's $100,000 and Over............. 20,743 $ 4,133 $ 7,431 $ 624 $ 225 -- 33,156 33,023
Average Interest Rate.......... 5.63% 6.19% 6.34% 6.10% 5.66% 5.87%
CD's Under $100,000................ 73,676 10,555 3,264 2,540 217 25 90,277 90,088
Average Interest Rate.......... 5.14% 5.72% 5.78% 5.85% 5.98% 6.34% 5.25%
Securities Sold Under
Repurchase Agreements............ 9,157 -- -- -- -- -- 9,157 9,157
Average Interest Rate.......... 5.11% 5.11%
Notes Payable...................... 1,450 -- -- -- -- -- 1,450 1,450
Average Interest Rate.......... 8.00% 8.00%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing
Liabilities...................... $ 142,830 $ 14,688 $ 10,695 $ 3,164 $ 442 $ 40,529 $ 212,348 $ 212,026
Average Interest Rate.......... 4.71% 5.85% 6.17% 5.90% 5.82% 1.88% 4.34%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for unrealized gains of $407,000.
(2) Represents interest bearing deposits with Banks, FRB Stock, Federal Home
Loan Bank Stock and other marketable equity securities.
(3) Thirty percent of all NOW and Savings accounts have been designated as
maturing within one year.
(4) All Money Market accounts $25,000 and over and 30% of Money Market accounts
under $25,000 have been designated as maturing within one year.
PRIMARY USE OF FUNDS
Cash flows from deposit growth for the nine months ended September 30, 1998,
and year ended December 31, 1997, was $17.7 million and $4.6 million,
respectively. Cash flows from net increases in shareholders equity were $1.5
million and $9.4 million for the nine months ended September 30, 1998, and the
year ended December 31, 1997, respectively. Cash flows have been used primarily
to support loan
34
<PAGE>
growth of $17 million during the nine months ended September 30, 1998. On
September 30, 1998, the Company's loan to deposit ratio was 70.9%.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
For the year ended December 31, 1996, the Company reported net income of
$2.3 million, or $0.67 per share, compared to $1.8 million, or $0.56 per share,
for year ended December 31, 1995. Earnings for 1996 also produced a return on
average assets of 1.14% and a return on average stockholders' equity of 13.88%,
compared to 1.06% and 13.24%, respectively, for 1995. The significant factors
contributing to the improvement in earnings were the growth in operating revenue
net of interest expense and improved overhead expense as a percentage of that
revenue. Total assets were $254.9 million at December 31, 1996, compared to
$176.7 million on December 31, 1995, a $78.2 million or 44.3% growth.
Stockholders' equity was $19.7 million at the close of 1996, compared to $14.8
million in 1995, due to net earnings retention of $2.3 million less $379,000
cash dividends to shareholders, coupled with $2.9 million resulting from shares
issued in conjunction with the acquisition of Riherd Bank Holding Company.
Total loans as a percentage of total deposits improved to 65.6% at December
31, 1996, from 64.4% at year-end 1995. The improved loan to deposit ratio is a
result of an increase in total loans by $46.5 million, or 45.4%, while deposits
have increased by $67.8 million, or 42.7%. Therefore, loan growth during this
past year was the main contributor to the $1.7 million, or 25.1%, increase in
net interest income, as compared to 1995.
Non-interest income increased by 20.2% to $1.8 million in 1996 from $1.5
million in 1995. As a percentage of average assets, there was an increase to
0.88% from 0.85% in 1995. Non-interest expense increased by $1.2 million, or
23.0%, for the year ended 1996, as compared to 1995. When analyzing this ratio,
we would call attention to the one-time SAIF assessment of $327,000 before-tax
effect; without the SAIF impact the increase would have been only 16.6%.
Liquidity and capital ratios remain well within regulatory limits. Total
non-performing assets decreased by $253,000 to $404,000 in 1996 from $657,000 in
1995, a reduction of 38.5%. Non-performing assets as a percentage of total
assets decreased to 0.16% in 1996 from 0.37% in 1995.
Dividends paid in 1996 were $0.11 per share compared to $0.09 per share in
1995.
CAPITAL RESOURCES
Shareholders' equity at September 30, 1998, was $30.6 million, as compared
to $28.4 million at September 30, 1997, and $29.0 million at December 31, 1997,
as compared to $19.7 million at December 31, 1996. On July 15, 1997, the Company
completed a rights offering to existing shareholders and raised $6.8 million in
new capital.
The Comptroller establishes risk-based capital requirements 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 maintain 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. The Bank's goal
is to maintain its current status as a "well-capitalized institution" as that
term is defined by its regulators.
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
35
<PAGE>
to these guidelines has not had an adverse impact on the Company or the Bank.
Selected capital ratios at December 31, 1997, and 1996 compared to September 30,
1998, are as follows:
CAPITAL RATIOS
<TABLE>
<CAPTION>
ACTUAL WELL CAPITALIZED
---------------------- ---------------------- EXCESS
AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital
(to Risk Weighted Assets):
Consolidated................................................. $ 30,297 17.5% $ 17,303 10.0% $ 12,994
Bank......................................................... 23,633 13.5 17,537 10.0 6,096
Tier I Capital
(to Risk Weighted Assets):
Consolidated................................................. 28,695 16.6 10,382 6.0 18,313
Bank......................................................... 22,031 12.6 10,522 6.0 11,509
Tier I Capital
(to Average Assets):
Consolidated................................................. 28,695 9.9 14,457 5.0 14,238
Bank......................................................... 22,031 7.6 14,442 5.0 7,589
AS OF DECEMBER 31, 1997:
Total Capital
(to Risk Weighted Assets):
Consolidated................................................. $ 28,708 18.7% $ 15,383 10.0% $ 13,325
Bank......................................................... 22,866 14.8 15,484 10.0 7,382
Tier I Capital
(to Risk Weighted Assets):
Consolidated................................................. 27,213 17.7 9,230 6.0 17,983
Bank......................................................... 21,373 13.8 9,291 6.0 12,082
Tier I Capital
(to Average Assets):
Consolidated................................................. 27,213 10.2 13,339 5.0 13,874
Bank......................................................... 21,373 8.0 13,338 5.0 8,035
AS OF DECEMBER 31, 1996:
Total Capital
(to Risk Weighted Assets):
Consolidated................................................. $ 19,267 13.6% $ 14,189 10.0% $ 5,078
Bank......................................................... 21,538 15.2 14,183 10.0 7,355
Tier I Capital
(to Risk Weighted Assets):
Consolidated................................................. 17,871 12.6 8,514 6.0 9,357
Bank......................................................... 20,142 14.2 8,510 6.0 11,632
Tier I Capital
(to Average Assets):
Consolidated................................................. 17,871 7.3 12,320 5.0 5,551
Bank......................................................... 20,142 8.2 12,319 5.0 7,823
</TABLE>
EFFECTS OF INFLATION AND CHANGING PRICES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a
36
<PAGE>
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on the performance of a financial
institution than the effects of general levels of inflation. Although interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services, increases in inflation generally have resulted in
increased interest rates. In addition, inflation affects financial institutions'
increased cost of goods and services purchased, the cost of salaries and
benefits, occupancy expense, and similar items. Inflation and related increases
in interest rates generally decrease the market value of investments and loans
held and may adversely affect liquidity, earnings, and shareholders' equity.
Mortgage originations and refinancings tend to slow as interest rates increase,
and can reduce the Company's earnings from such activities and the income from
the sale of residential mortgage loans in the secondary market.
MONETARY POLICIES
The results of operations of the Bank will be affected by credit policies of
monetary authorities, particularly the Federal Reserve Board. The instruments of
monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, changes in reserve requirements against member bank deposits
and limitations on interest rates which member banks may pay on time and savings
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Company or the Bank.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial 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. 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 stated.
On January 1, 1998, the Company adopted 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.
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
years beginning after June 15, 1999. The financial impact of the adoption of
this statement has not been determined. However, the effect of the adoption of
the statement is not expected to be material.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain
consolidated quarterly financial information of the Company. This information is
derived from the Company's unaudited financial statements which include, in the
opinion of management, all normal recurring adjustments which management
considers necessary for a fair presentation of the results for such periods.
This information should be read in conjunction with the Company's Financial
Statements included elsewhere in this Prospectus. The results for any quarter
are not necessarily indicative of results for any future period.
37
<PAGE>
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE
DATA) 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
- ------------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Net interest income........................ $ 2,943 $ 2,941 $ 2,790 $ 2,773 $ 2,757 $ 2,586 $ 2,641 $ 2,580
Provision for loan losses.................. 170 150 80 110 70 130 130 50
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses.............................. 2,773 2,791 2,710 2,663 2,687 2,456 2,511 2,530
Other income (excluding securities
transactions)............................ 579 565 570 534 565 498 555 566
Securities gains (losses), net............. -- -- 2 -- 1 -- -- --
Other expenses............................. 2,381 2,292 2,162 2,066 2,003 1,918 1,927 1,876
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax expense........... 971 1,064 1,120 1,131 1,250 1,036 1,139 1,220
Income tax expense......................... 333 367 388 391 436 356 398 430
--------- --------- --------- --------- --------- --------- --------- ---------
Net income................................. $ 638 $ 697 $ 732 $ 740 $ 814 $ 680 $ 741 $ 790
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Basic earnings per common share............ $ 0.13 $ 0.15 $ 0.15 $ 0.16 $ 0.17 $ 0.17 $ 0.19 $ 0.21
Diluted earnings per common share.......... 0.13 0.14 0.15 0.15 0.17 0.17 0.19 0.20
<CAPTION>
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE
DATA) 3Q 2Q 1Q
- ------------------------------------------- --------- --------- ---------
Net interest income........................ $ 2,161 $ 1,918 $ 1,819
Provision for loan losses.................. 80 90 115
--------- --------- ---------
Net interest income after provision for
loan losses.............................. 2,081 1,828 1,704
Other income (excluding securities
transactions)............................ 415 395 426
Securities gains (losses), net............. -- (25) --
Other expenses............................. 1,839 1,332 1,313
--------- --------- ---------
Income before income tax expense........... 657 866 817
Income tax expense......................... 226 305 286
--------- --------- ---------
Net income................................. $ 431 $ 561 $ 531
--------- --------- ---------
--------- --------- ---------
Basic earnings per common share............ $ 0.13 $ 0.17 $ 0.16
Diluted earnings per common share.......... 0.12 0.17 0.16
</TABLE>
YEAR 2000 COMPLIANCE
THE STATE OF THE COMPANY'S READINESS
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could cause a system failure or miscalculations resulting in
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements or engage in similar normal business
activities.
The Company has a four-phase plan to resolve the Year 2000 issue with
respect to internal and external systems:
- Identifying significant systems and assessing potential Year 2000 issues
relating to those systems;
- Renovating, repairing and replacing noncompliant systems;
- Testing and validating solutions; and
- Implementing those solutions.
The first phase of the plan has been completed and the Company has
substantially completed the second phase. The first phase involved assessing all
computer controlled systems, including the computer systems of the Company's
vendors, items processing, ATMs, telecommunications, security and alarm,
elevator, telephone, HVAC, and environmental systems with embedded microchips.
The Company's local area network has been evaluated and is Year 2000 compliant.
The second phase involves upgrading, as applicable, hardware, software,
networks, ATMs and other processing platforms. The noncompliant individual
personal computers throughout the organization have been replaced. The Company
is in the process of upgrading the current software versions of the spreadsheet
and word processing programs it uses for internal purposes to the Year 2000
compliant versions. The Company expects to have substantially all of the Year
2000 system and application changes completed by the end of 1998.
The testing, validation and implementation phases are underway. 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.
The vast majority of the Company's processing needs are outsourced to two
outside vendors and the Company is monitoring their Year 2000 compliance
progress closely. The Company will participate during
38
<PAGE>
the fourth quarter of 1998 with on-site testings of the vendors' systems. The
Comptroller also has been reviewing the efforts of the Company's vendors and
thus far has expressed satisfaction with their progress.
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 portfolio amounts 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.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The costs associated with the Company's Year 2000 issues are not expected to
have a material impact on the long term results of the operations or financial
condition of the Company. The total expense to upgrade the individual personal
computers throughout the organization is expected to be approximately $150,000.
The software upgrade is expected to cost approximately $15,000. To date, the
Company has incurred expenses of approximately $78,000 in connection with its
Year 2000 plan. Expenses incurred in the upgrade and testing of the new hardware
and software for the vendors' data processing systems are the outside vendors'
responsibility. The costs of the plan and the date on which the Company plans to
complete its Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no assurance that these estimates will be
achieved, and actual results could differ materially from those plans.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
There can be no assurance that all necessary modifications will be
identified and corrected or that unforeseen difficulties or costs will not
arise. The Company believes that the failure of third parties to address their
Year 2000 problems in a timely fashion presents the greatest likelihood of the
Company not being fully Year 2000 compliant. Such a failure could materially
adversely impact the Company's operations, the estimated costs of the Year 2000
plan and the target dates for completion. The effect of non-compliance by third
parties is not determinable at this time. The Company could be subject to
litigation for computer systems product failure, including equipment shutdown or
failure to properly date business records or process transactions. The amount of
potential liability, if any, and lost revenue cannot be reasonably estimated at
this time.
THE COMPANY'S CONTINGENCY PLANS
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 power generator that should allow continued processing
and service to the Company's customers in the event of interruption of electric
utility service.
39
<PAGE>
BUSINESS
GENERAL
The Company is a one-bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), which commenced operations in
1987 by acquiring the capital stock of the Bank, which had been formed in 1986.
The Company is currently headquartered in Lake City, Florida, but will relocate
its headquarters to Jacksonville, Florida, in connection with its expansion
plans described below. The Company is the largest community bank headquartered
in Northeast Florida. The Bank is a national banking association subject to the
supervision of the Comptroller. It provides traditional deposit, lending and
mortgage products and services to its commercial and retail customers through
eleven full service branches located within the following contiguous counties in
Northeast Florida: Columbia, Suwannee, Baker, Bradford, Union (the "Core
Markets") and Alachua County. From 1993 to 1998, the Company experienced
substantial growth by industry standards. At September 30, 1998, the Company had
total assets of $290.6 million, total loans of $176.6 million, total deposits of
$249.2 million, and total shareholders' equity of $30.6 million, reflecting
compound annual growth rates of 24.2%, 23.1%, 23.1% and 27.7%, respectively, for
the five-year period ended September 30, 1998. Net income for the nine months
ended September 30, 1998, and for the year ended December 31, 1997, was $2.1
million and $3.0 million, respectively, as compared with $2.2 million and $2.3
million for the period nine months ended September 30, 1997, and for the year
ended December 31, 1996, respectively. For the five-year period ended December
31, 1997, the compound annual earnings growth rate was 43.1%.
EVOLUTION OF THE FLORIDA BANKING MARKET
Significant changes in interstate banking and branching laws, enacted during
the early 1980s, have allowed bank holding companies to aggressively expand into
new markets that have attractive growth rates and demographics. As a result,
substantial consolidation of the Florida banking market has occurred. According
to the FDIC, the number of commercial banking entities operating in Florida
declined from approximately 550 as of December 31, 1980, to approximately 200 as
of June 30, 1998, or approximately 64% over the 17 year period. Management
believes Florida has been particularly attractive to regional bank holding
companies because it is the fourth largest state in the country in terms of
total population (14.7 million) and is among the ten fastest growing states in
the country (approximately 2% annually). Currently, more than twenty-five
out-of-state bank and thrift holding companies operate in Florida. As more
out-of-state bank holding companies enter the Florida market, the Company
believes that the number of depository institutions headquartered and operating
in Florida will continue to decline.
The Company has observed a similar consolidation trend in the markets in and
around Gainesville and Jacksonville, into which it intends to expand.
Historically the Company competed successfully in its Core Markets against
larger bank holding companies for middle market customers. In the Company's
targeted geographic expansion markets, many of such customers have preferred the
banking services and products of banks that are locally headquartered.
Increasingly, however, large regional bank holding companies are entering the
Company's targeted markets by acquiring such previously locally headquartered
banks. For example, in January 1998, NationsBank Corporation (now BankAmerica
Corporation) ("NationsBank") completed its acquisition of Jacksonville-based
Barnett Banks, Inc. ("Barnett"), which, prior to its acquisition, was the
largest bank headquartered in Florida. The acquisition of Barnett closely
followed the acquisition of three of Jacksonville's five community banks by
SouthTrust Bank Corporation ("SouthTrust") and Compass Bancshares, Inc.
("Compass") in 1996 and 1997. Similarly, Gainesville State Bank, the largest
community bank in Gainesville and the surrounding Alachua County (the
"Gainesville Market"), was acquired by Compass Bank in 1997. As a result, the
Company now competes in its Core Markets, and will compete in its targeted
geographic expansion markets, primarily with SunTrust Banks, Inc., NationsBank,
First Union Corporation, SouthTrust, AmSouth Bancorporation and Compass Bank,
all of which are headquartered outside of Florida.
40
<PAGE>
GROWTH OPPORTUNITY FOR THE COMPANY
Management believes that a significant segment of the historical customer
base of Barnett and those of other acquired community banks in Northeast
Florida, particularly individuals and small and medium-sized businesses,
preferred the personalized service that characterized their relationships with
the locally headquartered banks. Many of these personal relationships have been
disrupted as the larger, regional financial institutions increasingly focus on
larger corporate customers, offer primarily standardized loan and deposit
products and services, and employ centralized management and more remote
decision-making. Thus, Company management believes there exists a unique
opportunity to address the under-served banking needs of individuals and small
and medium-sized businesses in its targeted geographic expansion markets, which
are contiguous and demographically similar to the Company's existing Core
Markets. Accordingly, the Company's current strategic focus is to immediately
capitalize on this market opportunity. In pursuing this opportunity, the Company
will continue to focus on that specific segment of the market to which it has
historically appealed. The Company believes that its historical strategy of
providing personalized and consistent service to its middle-market corporate
customers and individuals will allow it to continue to compete profitably, not
only in the markets that it presently serves but in other markets as well.
As of June 30, 1998, the Company's present markets (which include the
Gainesville Market) and the Jacksonville market, which consists of Jacksonville,
St. Augustine, Orange Park, Ponte Vedra Beach, the Jacksonville Beaches,
Fernandina Beach and Amelia Island, included in the four counties of Nassau,
Clay, Duval and St. Johns (collectively, the "Jacksonville Market"), represent a
combined deposit market of nearly $12.7 billion. The Jacksonville Market alone
has a deposit market of $10.2 billion, and the Company intends to continue its
primary marketing focus of providing traditional banking products and services
to individuals and small and medium-sized businesses in that market. Management
believes that this segment of the market is currently under-served.
BUSINESS STRATEGY
The Company's primary goal is to enhance profitability and shareholder
returns through aggressive but sound growth. The Company's long-term strategy is
to (i) continue to grow its full service banking operations by expanding into
new markets, (ii) leverage current branch capacity, (iii) expand its mortgage,
consumer, and commercial lending activities and (iv) continue to differentiate
itself from its larger competitors by emphasizing personalized,
relationship-driven service provided by a locally-headquartered financial
institution.
EXPAND IN UNDER-SERVED MARKETS
The consolidation of the banking industry in Northeast Florida has created a
window of opportunity for the Company to expand its operations in the
Gainesville Market and to enter the Jacksonville Market (collectively, the
"Expansion Markets"). The Expansion Markets are contiguous and culturally
similar to the Core Markets. Like the Core Markets, the Expansion Markets
consist in large part of individuals and small and medium-sized businesses. The
Company believes that its familiarity with meeting the banking needs and
expectations of similar customers in the Core Markets makes the Company
particularly qualified to attract banking customers accustomed to banking with
community banks in the Expansion Markets. The recent consolidation also has
dislocated qualified banking professionals who have strong ties to, and an
understanding of, their local markets. During 1998, the Company added to its
senior management G. Thomas Frankland and Corey J. Coughlin, both of whom bring
substantial experience with the Jacksonville banking market. The Company
believes that it can attract additional banking professionals, thereby
benefiting from their experience and their ability in many instances to bring
with them the banking business of their loyal customers. These factors, together
with the Bank's asset size of $291 million at September 30, 1998, and its legal
lending limit of approximately $3.6 million per borrower, position the Company
to work more effectively with middle-market customers than many smaller
community banks in the Expansion Markets.
41
<PAGE>
The Company recognizes that it must act promptly to take full advantage of
this marketing opportunity. The Company plans to relocate its corporate
headquarters to Jacksonville within the next year. It plans to expand its
operations from eleven branches to sixteen branches by opening additional
branches in the Jacksonville and Gainesville Markets within the next two years.
The Company plans to open a loan production office in the Jacksonville Market
during the first quarter of 1999. The Company intends to expand by acquiring
existing branches if it is presented with attractive opportunities and if not,
then by opening de novo branches.
IMPROVE LOAN-TO-DEPOSIT RATIO WHILE MAINTAINING QUALITY LOANS
In order to enhance profitability by improving the spread between the
average interest rate earned on earning assets relative to the average interest
rate paid on deposits and other liabilities, the Company plans over the near
term to increase its loan-to-deposit ratio while maintaining asset quality. The
Company intends to accomplish its goal by adding additional loan production
officers, by adopting a more aggressive marketing strategy designed to attract
quality loans in its Core and Expansion Markets and by continuing to
intentionally focus on an increasingly under-served market. However, maintaining
loan quality is of paramount importance to the Company and it is committed to
avoid sacrificing loan quality in this effort to increase loan volume.
INCREASE NON-INTEREST INCOME
The Company also plans to increase profitability by increasing its
non-interest income. The Company currently generates fees from service charges
on its checking accounts, ATM charges, service charges on its credit cards, and
mortgage origination and servicing fees. The Company anticipates that the
increase in customers resulting from the Company's expansion will increase the
volume of fees it charges. In addition, the Company also is in the process of
raising certain fees to levels that are consistent with fees generally charged
by the Company's competitors in the relevant market. Management continues to
assess other opportunities to increase non-interest income.
PROVIDE COMMUNITY BANKING SERVICE
The Company believes that it can achieve the goals outlined above through a
continued commitment to the "community bank philosophy", which emphasizes
offering a broad range of personalized products and services through banking
professionals who understand the banking industry and the banking needs of the
local communities they serve. Each branch manager and individual loan officer is
given a certain degree of authority and discretion to approve loans and to price
loans and services in order to respond quickly and efficiently to the needs of
the Company's customers. In implementing this strategy, the Company will combine
the experience and customer networks of its loan officers with centralized
information technology to effectively price and provide customized banking
services to enhance overall profitability. The Company intends to pursue this
strategy throughout its Core and Expansion Markets and operate a multi-office
community bank that emphasizes decision-making at the local level.
To ensure that the Company's proposed expansion does not erode its standards
for service and quality, the Company recently created three operating divisions:
the Southern Division, the Eastern Division and the Central Division. The
Company will create a fourth division, the First Coast Division, when it enters
the Jacksonville Market. This new organizational structure will help to ensure
that the Company's banking products and services are tailored to the individual
markets it serves, as opposed to the "one size fits all" approach that generally
is followed by larger financial institutions. The divisions are headed by
Division Presidents who effectively have the authority to operate the division
as a community bank, so long as it is done within the parameters of the
Company's policies. In addition, the Company plans to create in each division
advisory boards composed of business leaders from that community.
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DEMOGRAPHICS OF CORE AND EXPANSION MARKETS(1)
JACKSONVILLE MARKET
The population of the Jacksonville Market increased from approximately
907,000 in 1990 to approximately 1,028,000 in 1997, representing an increase of
13.3% over that period. The 1993 median household income (the latest available
census information) in the Jacksonville Market ranged from $31,892 to $38,102.
The average unemployment rate for 1997 was 3.6%, compared to Florida's
unemployment rate of 5.1% for the same period. As of June 30, 1998, there were
226 bank and thrift offices in the Jacksonville Market, with aggregate deposits
of approximately $10.2 billion. Deposits in the Jacksonville Market increased
approximately $3 billion from 1992 through 1997. The Jacksonville Market has a
diverse economy based on healthcare, manufacturing, distribution,
telecommunications, biomedical, financial services, military, federal, state and
local government and transportation. Within the environs of the Jacksonville
Market are the resorts of Amelia Island, Ponte Vedra Beach and The World Golf
Village. The Jacksonville Market also is home to the Mayo Clinic, the University
of North Florida, Jacksonville University, and the National Football League's
most recent expansion team, the Jacksonville Jaguars.
GAINESVILLE MARKET
The population of the Gainesville Market increased from approximately
182,000 in 1990 to approximately 208,000 in 1997, representing an increase of
14.3% over that period. The 1993 median household income (the latest available
census information) in the Gainesville Market was $26,683. The average
unemployment rate in the Gainesville Market in 1997 was 2.8%. As of June 30,
1998, there were 53 bank and thrift offices (including two of the Company's
offices) in the Gainesville Market with aggregate deposits of approximately $1.6
billion. Deposits in the Gainesville Market increased approximately $200 million
from 1992 through 1997. The Gainesville Market has an economy based on state and
local government, healthcare and retail/servicing. Gainesville also is the home
of the University of Florida, with approximately 46,000 full-time students,
faculty and staff in the fall of 1998.
CORE MARKETS
The population of the Core Markets increased from approximately 120,000 in
1990 to approximately 146,000 in 1997, representing an increase of 21.7% over
that period. The 1993 median household income (the latest available census
information) in the Core Markets ranged from $21,767 to $27,568. The average
unemployment rate in 1997 was 4.6%. As of June 30, 1998, there were 31 bank and
thrift offices (including nine of the Company's offices) in the Core Markets
with aggregate deposits of approximately $909 million. Deposits in the Core
Markets increased approximately $96 million from 1992 through 1997. The Core
Markets have a diversified economy based on timber farming, light manufacturing,
health care (including a major Veteran's Administration Hospital), manufactured
housing, aircraft refurbishing and state and local government.
DEPOSIT PRODUCTS AND SERVICES
The Company offers various deposit products and services to its retail and
commercial customers. These products include commercial and retail checking
accounts, specialized low-cost checking for customers who write few checks per
month, money market accounts for consumers and commercial customers, NOW
accounts and savings accounts. Additionally, the Company offers an
interest-bearing transaction account for seniors with no minimum balance
requirements, no service charge and no per-check charge. For customer
convenience and ease of storage, the Company offers image-based monthly account
statements, as well as an automated telephone banking service for balance
reporting. The
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(1) Population data was derived from publications prepared by the University of
Florida Bureau of Economic and Business Research. Deposit data was derived
from information accumulated by The Florida Bankers Association. Median
household income was based on Bureau of Census data. Unemployment rates were
obtained from statistics compiled by the State of Florida Department of
Labor and Employment Security.
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Company's deposit services include cash management for commercial customers for
overnight investment, wire transfer services, collections, money orders, safe
deposit boxes and traveler's checks. Most of the Company's offices offer
automated teller machines ("ATMs"), which may be used throughout the United
States and internationally by Bank customers and non-customers. The Company
intends to provide that service at all of its offices in the near future, as
newer ATM models, with more features, become available.
The Company's decentralized operations allow the Division Presidents and
their staffs to adjust interest rates (from the Company's posted rates) within
prescribed ranges to keep or attract deposit business. Additionally, the Company
compares its service charge fees to market levels on at least an annual basis,
keeping its charges competitive with, and generally lower than, those of the
regional banks. All deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to the maximum amount permitted by law (generally
$100,000 per depositor subject to aggregation rules).
In an effort to accommodate those customers who prefer to conduct their
banking business from home, in 1999 the Company plans to offer its customers
personal computer-based electronic banking, including automated bill paying and
loan applications. These services will be offered by the Bank through
third-party vendors.
As of September 30, 1998, the Company's deposit base, totalling
approximately $249.2 million, consisted of approximately $31.3 million in
non-interest-bearing demand deposits (12.6% of total deposits), approximately
$68.2 million in interest-bearing demand deposits and money market accounts
(27.3% of total deposits), approximately $16.4 million in savings deposits (6.6%
of total deposits), approximately $94.6 million in time deposits less than
$100,000 (38.0% of total deposits), and approximately $38.7 million in time
deposits of $100,000 or more (15.5% of total deposits).
LOAN PRODUCTS AND LENDING POLICY
IN GENERAL
The Company provides to its customers a full range of short- to medium-term
commercial, agricultural, Small Business Administration ("SBA") guaranteed,
Farmers Home Administration guaranteed, and personal loans, both secured and
unsecured. Credit is extended consistent with a comprehensive loan policy that
governs advance rates, maturities and acceptable collateral. The Company's loan
policy grants lending authority based on a tiered schedule, with significant
authority at the Division President level. Exceptions to the policy must be
recommended by the applicable Division President and approved by either the
President or the Chief Executive Officer of the Bank before the credit
commitment can be made. If the loan is for an amount exceeding $1.5 million, the
Executive Committee of the Bank's Board of Directors must approve any exceptions
to the Bank's loan policy.
COMMERCIAL LOANS
Commercial loan products include (i) short-term loans and lines of credit
for working capital purposes, which are generally secured by the borrower's
current assets (usually accounts receivables and inventory), (ii) intermediate
term loans for farm and non-farm equipment and crop loans and (iii) SBA
guaranteed loans. They include secured and unsecured loans for working capital,
business expansion and purchases of equipment and machinery.
Lines of credit are subject to annual review and approval, generally not
later than 120 days after the closing of the customer's fiscal year end.
Advances are limited to 75.0% of eligible accounts receivable and up to 50.0% on
inventory. These credits are usually monitored through the review of a
receivables aging report and borrowing base report.
Term loans having maturities greater than one year are generally secured by
equipment or rolling stock with advances limited to no more than 75.0% of cost.
In virtually all cases, the Bank requires the personal guaranty of the owners or
major shareholders of the borrower.
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Agricultural loans are granted to experienced farmers with demonstrated
capabilities, acceptable historical cash flows, reasonable cash flow projections
and adequate secondary sources of repayment.
As of September 30, 1998, the Company had commercial loans (excluding
commercial real estate loans) of $24.0 million, representing approximately 13.6%
of the Company's loan portfolio.
COMMERCIAL REAL ESTATE LOANS
The Company's commercial real estate lending products include: construction
loans, mini-permanent and permanent financing for commercial properties,
acquisition and development loans for residential and commercial property
developers and investment property financing.
Construction loan borrowers are required to inject equity equal to at least
20% of the total cost of the construction project before the Company will
advance funds on the loan. The Company advances funds pursuant to a draw
schedule and makes inspections prior to each draw request. The Company's
construction lending requirements also may include a plan and cost review,
depending on the complexity of the project. The plan and cost review and the
inspections are out-sourced by the Company to qualified professionals.
Mini-permanent and permanent financing loans are owner occupied projects
which demonstrate proven cash flows that result in a debt service coverage ratio
of at least 1.25 to 1, based on a twenty year amortization. Mini-permanent loan
amortization may be as long as twenty-five years, but requires balloon
maturities within five to eight years.
The Company extends acquisition and development loans to borrowers who have
historically fulfilled their financial obligations. The relevant acquisition or
development project must demonstrate acceptable absorption periods and have an
equity investment of at least 25% of the total project costs. Such loans
typically mature within twenty-four months.
Loans on investment property are subject to the same underwriting criteria
as mini-permanent loans and include a threshold debt service coverage ratio of
at least 1.25 to 1.
As of September 30, 1998, the Company had commercial real estate loans of
$54.6 million, representing approximately 30.9% of the Company's loan portfolio.
RESIDENTIAL AND CONSUMER LOANS
Consumer lending products include open- and closed-ended home equity and
home improvement loans, automobile, boat, and recreational vehicle loans and
loans for other asset purchases. The Company offers Visa and MasterCard credit
and debit card products to consumers and commercial customers. Applications for
these products are evaluated based on the same credit requirements as direct
loans.
Loans to consumers are extended after a credit evaluation, including the
creditworthiness of the borrower, the purpose of the credit, and the secondary
source of repayment. Specifically, the lender reviews a credit bureau report for
the borrower's credit history and calculates a debt-to-income ratio based on the
borrower's gross monthly income to fixed debt payments. A ratio higher than
40.0% is generally considered unacceptable. For automobile loans, the policy
requires a minimum down payment of 10.0% with maturities based on the age of the
vehicle.
The Company offers a variety of one-to four-family residential loan
products, including residential construction loans and residential acquisition
financing.
Residential construction financing typically includes a construction loan
agreement with a construction draw schedule and third party inspections. A
commitment for permanent financing is required prior to closing. Typical
residential construction loans mature within six to eight months. The Company
offers a construction/permanent package loan product in instances where the
Company acts as the permanent lender.
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Residential loans are originated for the Company's portfolio, as well as for
sale in the secondary market. The maximum loan amount is based on a loan to
value ratio of 80% or less, where the value is equal to the lesser of the cost
or the appraised value. The majority of these loans are originated for sale in
the secondary market and are sold on a servicing released basis. The Company
services loans originated for its portfolio.
As of September 30, 1998, the Company had consumer and real estate loans of
$20.2 million and $132.4 million, respectively, representing approximately 11.4%
and 75%, respectively, of the Company's total loan portfolio. As of September
30, 1998, the Company's real estate loan portfolio consisted of $5.8 million in
construction loans, $72.0 million in residential real estate loans, and $54.6
million in commercial loans secured by real estate.
LOAN REVIEW AND NONPERFORMING ASSETS
The Company's loan review officer, whose position is independent of the loan
production and administration process, has the responsibility to perform timely
reviews of credits within the portfolio with a review scope and assessment
criteria comparable to that of the Bank's regulators.
All new and renewed secured credits over $500,000 and unsecured credits over
$100,000 are reviewed within one week of approval. Additionally, a comprehensive
annual review is conducted on all credits over $250,000, past dues,
non-performing assets and other real estate owned. Smaller credits are reviewed
utilizing pre-determined standards, which include documentation and compliance,
by a person in loan operations, with exceptions referred to the loan review
officer. Problem credits, which include all non-performing assets, are reviewed
at least quarterly with written documentation which includes the reason for the
problem, collateral support, a plan for resolution of the problem and time
frames for the resolution. Delinquent loans are reviewed at least weekly and
monitored by the Board of Directors of the Bank in the monthly meetings.
A written report is developed on the findings of the various loan review
functions and reported directly to the Audit Committee of the Company's Board of
Directors, which meets quarterly. The allowance for loan losses is reviewed
monthly in order to make the appropriate loan loss provision based on the loan
review findings, delinquency, historical loan losses and current economic
trends.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability committee is comprised of selected senior
officers of the Bank who are charged with managing the assets and liabilities of
the Bank. The asset/liability committee manages asset growth, liquidity and
capital in order to maximize income and reduce interest rate risk. The
asset/liability committee directs the Bank's overall acquisition and allocation
of funds. At its quarterly meetings, the asset/liability committee reviews and
discusses peer group comparisons, the ratio of rate-sensitive assets to
rate-sensitive liabilities, the ratio of allowance for loan losses to
outstanding and nonperforming loans, and other variables, such as expected loan
demand, investment opportunities, core deposit growth within specified
categories, regulatory changes, monetary policy adjustments and the overall
state of the economy.
INVESTMENT POLICY
The Bank's investment portfolio policy is to maximize income consistent with
liquidity, asset quality, regulatory constraints and asset/liability objectives.
The policy is reviewed at least annually by the Bank's Board of Directors. The
Board of Directors is provided monthly information recapping purchases and sales
with the resulting gains or losses, average maturity, federal taxable equivalent
yields and appreciation or depreciation by investment categories. The investment
committee, which includes two outside directors, approves all purchases or sales
amounting to more than 10.0% of the aggregate portfolio book value.
The Bank invests primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States and
obligations of agencies of the United States. In addition, the Bank enters into
federal funds transactions with its principal correspondent banks, and acts as a
net seller of such funds. The sale of federal funds amounts to a short-term loan
from the Bank to another bank.
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Other investments include Independent Bankers Bank stock, Federal Reserve
Bank stock and Federal Home Loan Bank stock that are required for the Bank to be
a member of, and to conduct business with, such institutions. Dividends on such
investments are determined by the institutions and are payable semi-annually or
quarterly.
COMPETITION
Within the Jacksonville, Gainesville and Core Markets, there are competing
financial institutions consisting primarily of other commercial banks, savings
and loan offices and credit unions. Certain non-bank financial institutions
affiliated with Florida banks or thrift institutions offer limited financial
services, including lending and deposit gathering activities. The Bank also
competes for deposits and loans with brokerage firms, mobile home lenders,
consumer finance companies, insurance companies, mortgage banking companies,
money market mutual funds and other financial institutions.
In addition, the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 has removed substantially all state barriers to the acquisition of banks
by out-of-state bank holding companies. In addition, certain out-of-state bank
holding companies have entered the Florida banking market by acquiring failing
thrift institutions and commercial banks. Florida banks and bank holding
companies also may enter the Gainesville and Core Markets by acquiring a
financial institution, by establishing DE NOVO branches or by forming DE NOVO
banks within the market.
Competition for deposit and loan business in the Jacksonville, Gainesville,
and Core Markets will continue to be intense because of existing competitors,
the accelerating pace of product deregulation and the likelihood of expansion
into the Gainesville and Core Markets by other institutions. To compete, the
Bank relies on specialized services, responsive handling of customer needs,
customer contact by Bank officers, directors and staff, and the appeal of a
locally-owned, relationship-driven institution.
HISTORICAL GROWTH
The Bank has operated in Lake City, Columbia County, Florida since its
organization in 1986. In January 1987 the Company was formed as a bank holding
company to facilitate expansion opportunities. In 1988, the Company organized
Citizens Bank of Live Oak ("Citizens") in Suwannee County, Florida, and in
November 1992 acquired an Anchor Savings Bank ("Anchor") office in Macclenny,
Baker County, Florida. In 1990, the Bank opened its first DE NOVO branch in Fort
White, Columbia County, Florida. In 1993, the Bank acquired additional banking
offices in Lake City and Live Oak from Anchor. The Company consummated its first
merger with another bank holding company on April 1, 1994, when Bradford
Bankshares ("Bradford") combined with the Company resulting in a branch in
Starke, Bradford County, Florida. On August 31, 1996, Riherd Bank Holding
Company ("Riherd") merged with the Company. The Riherd merger resulted in three
additional offices for the Bank, one of which is located in Union County,
Florida, and two of which are in Alachua County, Florida. Both the Bradford and
the Riherd transactions were accounted for as purchase transactions. In August,
1997, the Bank opened its eleventh office, which is located in Lake City.
EMPLOYEES
As of September 30, 1998, the Bank had 151 full-time equivalent employees.
The Company's operations are conducted through the Bank and, consequently, the
Company does not have any separate employees.
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PROPERTIES
The Bank currently operates out of eleven branch offices and a non-customer
operations center. All branches, except the two Gainesville branches, have ATMs.
The Company owns the following properties:
COMPANY PROPERTIES
<TABLE>
<CAPTION>
APPROXIMATE SQUARE YEAR ESTABLISHED/
OFFICE LOCATION FOOTAGE ACQUIRED
- --------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
LAKE CITY (COLUMBIA)
- 201 North Marion Street (1)............................................ 22,000 1986
- 145 West Baya Avenue................................................... 10,100 1993
- 4420 U.S. 90 West...................................................... 2,870 1997
- 1 CNB Place, East U.S. 90 (2).......................................... 7,000 1996
LIVE OAK (SUWANNEE)
- 205 White Avenue, S.E. ................................................ 6,000 1988
- 1562 South Ohio Avenue................................................. 2,000 1993
FORT WHITE (COLUMBIA)
- Highway 27............................................................. 2,200 1990
MACCLENNEY (BAKER)
- 595 South Sixth Street................................................. 4,800 1992
STARKE (BRADFORD)
- 606 West Madison Street................................................ 8,000 1994
GAINESVILLE (ALACHUA)
- 5027 Northwest 34th Street............................................. 2,000 1996
- 11411 North State Road 121............................................. 4,500 1996
LAKE BUTLER (UNION)
- 300 West Main Street................................................... 6,750 1996
</TABLE>
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(1) Main office.
(2) Houses the operations center including bookkeeping, proof and accounting.
All properties, including land, improvements, furniture, fixtures, and
equipment, are owned by the Bank and had a total net book value at September 30,
1998, of approximately $10.8 million. In the opinion of the Company's
management, the properties are adequately covered by insurance.
LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their property
the subject of, any material pending legal proceedings.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") which may be inspected and
copied at the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such materials may be obtained from the
Public Reference Section of the Commission upon payment of the prescribed fees.
Such information may also be accessed electronically by means of the
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Commission's home page on the Internet at http:\\www.sec.gov. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330.
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-2 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock to
which this Prospectus relates. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all the information set forth in
the Registration Statement, including the exhibits thereto, which may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C., 20549 upon payment of the prescribed fees.
Summaries of and references to various documents in this Prospectus do not
purport to be complete and in each such case reference is made to the copy of
such document filed as an exhibit to the Registration Statement.
SUPERVISION AND REGULATION
GENERAL
As a registered bank holding company, the Company is subject to the
supervision of, and regular inspection by, the Federal Reserve Board under the
BHC Act. The Bank is organized as a national banking association, which is
subject to regulation, supervision and examination by the Comptroller. The Bank
is also subject to regulation by the FDIC and other federal regulatory agencies.
In addition, the Company and the Bank are subject to various other laws and
regulations and supervision and examination by other regulatory agencies, all of
which directly or indirectly affect the operations and management of the Company
and the Bank and their ability to make distributions. The following discussion
summarizes certain aspects of those laws and regulations that affect the
Company.
The activities of the Company and the Bank are limited to banking, managing
or controlling banks, or any other activity which the Federal Reserve Board
determines to be so closely related to banking, managing or controlling banks as
to be a proper incident thereto. In making such determinations, the Federal
Reserve Board is required to consider whether the performance of such activities
by the Company or the Bank can reasonably be expected to produce benefits to the
public such as greater convenience, increased competition or gains in efficiency
that outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. Generally, the Company would be required to obtain prior
approval of the Federal Reserve Board to engage in any new activity or to
acquire more than 5% of any class of voting stock of any company or any bank
which is not already majority-owned by the Company.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Banking and Branching Act"), bank holding companies are
able to acquire banks in states other than their respective home states, without
regard to the permissibility of such acquisitions under state laws. The
transaction would still be subject to any state requirement that the Bank has
been organized and operating for a minimum period of time, not to exceed five
years, and the requirement that the respective bank holding company, prior to or
following the proposed acquisition, controls no more than ten percent (10%) of
the total amount of deposits of insured depository institutions in the United
States and less than thirty percent (30%) of such deposits in that state (or
such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. This provision, which
was effective June 1, 1997, allowed each state, prior to the effective date, the
opportunity to "opt out" of this provision, thereby prohibiting interstate
branching within that state. Florida did not "opt out" of the interstate
branching provisions of the Interstate Banking and Branching Act. Furthermore,
pursuant to the Interstate Banking and Branching Act, a bank is now able to open
new branches in a state in which it does not already have banking operations if
such state enacts a law permitting de novo branching.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood
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and timing of any such proposals or bills being enacted and the impact they
might have on the Company and the Bank cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve Board, the Comptroller and the FDIC have issued
substantially similar risk-based and leverage capital guidelines applicable to
United States banking organizations. In addition, those regulatory agencies may
from time to time require that a banking organization maintain capital above the
minimum levels, whether because of its financial condition or actual or
anticipated growth. The Federal Reserve Board risk-based guidelines define a
two-tier capital framework. Tier 1 capital consists of common and qualifying
preferred shareholders' equity, less certain intangibles and other adjustments.
Tier 2 capital consists of subordinated and other qualifying debt, and the
allowance for credit losses up to 1.25% of risk-weighted assets. The sum of Tier
1 and Tier 2 capital less investments in unconsolidated subsidiaries represents
qualifying total capital, at least 50% of which must consist of Tier 1 capital.
Risk-based capital ratios are calculated by dividing Tier 1 and total capital by
risk-weighted assets. Assets and off-balance sheet exposures are assigned to one
of four categories of risk weights, based primarily on relative credit risk. The
minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%.
The Company's Tier 1 and total risk-based capital ratios under these guidelines
at September 30, 1998, were 16.6% and 17.5%, respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. The Company's leverage ratio at September 30, 1998 was 9.9%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized), and requires the respective federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan. The
liability of the parent holding company under any such guarantee is limited to
the lesser of 5% of the bank's assets at the time it became "undercapitalized"
or the amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take priority
over the parent's general unsecured creditors. In addition, FDICIA requires the
various regulatory agencies to prescribe certain non-capital standards for
safety and soundness related generally to operations and management, asset
quality and executive compensation and permits regulatory action against a
financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of at least 8% and a
leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, the
Bank is considered well capitalized.
Banking agencies have also adopted regulations which mandate that regulators
take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. That
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have
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adopted final regulations requiring regulators to consider interest rate risk
(when the interest rate sensitivity of an institution's assets does not match
the sensitivity of its liabilities or its off-balance sheet position) in the
determination of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, those banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
DISTRIBUTIONS
The Company's primary source of funds for cash distributions to its
shareholders is dividends received from the Bank. The Bank is subject to various
general regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain capital above regulatory minimums.
The appropriate federal regulatory authority is authorized to determine under
certain circumstances relating to the financial condition of the bank or bank
holding company that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof.
In addition to the foregoing, the ability of the Company and the Bank to pay
dividends may be affected by the various minimum capital requirements and the
capital and non-capital standards established under FDICIA, as described above.
The right of the Company, its shareholders and its creditors to participate in
any distribution of the assets or earnings of the Bank is further subject to the
prior claims of creditors of the Bank.
"SOURCE OF STRENGTH" POLICY
According to Federal Reserve Board policy, the Company is expected to act as
a source of financial strength to the Bank and to commit resources to support
the Bank.
51
<PAGE>
MANAGEMENT
DIRECTORS AND CERTAIN OFFICERS OF THE COMPANY
The following table sets forth information concerning the Company's
executive officers, directors and significant employees:
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------------------ -------------------------------------------------
<S> <C>
K.C. Trowell.............................. Chairman, Chief Executive Officer and Director of
the Company and the Bank
G. Thomas Frankland....................... Executive Vice President and Chief Financial
Officer of the Company and the Bank
Corey J. Coughlin......................... Executive Vice President of the Company and
President, Chief Operating Officer and Director
of the Bank
Joyce Bruner.............................. Executive Vice President and Secretary of the
Company and the Bank
Martha S. Williams........................ Senior Vice President and Controller of the
Company and Senior Vice President and Cashier of
the Bank
Lloyd D. Adams............................ Central Division President of the Bank
Robert E. Cameron......................... Southern Division President of the Bank
John D. Kennedy........................... Eastern Division President of the Bank
Suzanne M. Norris......................... Senior Vice President and Senior Credit
Administrator of the Bank
Thomas R. Andrews......................... Director of the Company
Audrey S. Bullard......................... Director of the Company
Raymon Land, Sr........................... Director of the Company
Marvin S. Pritchett....................... Director of the Company
William Streicher......................... Director of the Company
</TABLE>
K.C. TROWELL, age 60, is Chairman and Chief Executive Officer of the Company
and the Bank. He was elected to the Board of Directors in 1987 and serves as
Chairman of the Executive Committee of the Board of Directors of the Company and
the Bank. Mr. Trowell also serves on the Investment and Marketing Committees of
the Bank's Board of Directors. He has served as the Chairman and Chief Executive
Officer of the Company since its inception in 1987. Mr. Trowell is a Lake City,
Florida, native and has been actively involved in commercial banking management
in North Florida for over twenty-five years. He has also held management
positions with NationsBank of Lake City (and its predecessors), American Bank of
Jacksonville, and Barnett Banks, Inc. in Jacksonville. He is former Chairman of
the Board of Trustees of Florida Bankers Insurance Trust. He is a past director
of Community Bankers of Florida, past director of the Columbia County Committee
of 100, past director of North Central Florida Areawide Development Company, and
a former board member and chairman of both Lake City Medical Center and Columbia
County Industrial Development Authority.
G. THOMAS FRANKLAND, age 52, is the Executive Vice President and Chief
Financial Officer of the Company and the Bank. Mr. Frankland served as Vice
President and Chief Financial Officer of AirNet Communications Corporation in
Melbourne, Florida, from March 1998 until he joined the Company in
52
<PAGE>
November 1998. From May 1994 until August 1996, Mr. Frankland was Vice Chairman
and Chief Financial Officer of Ideon Group, Inc. ("Ideon"). Following the
acquisition of Ideon by CUC International, Inc. ("CUC"), in August 1996, Mr.
Frankland continued in a consulting capacity with CUC through December 1997.
Prior to May 1994, Mr. Frankland was a partner with Price Waterhouse LLP. During
his 24 years with Price Waterhouse LLP, including the seven years he served as
managing partner of the Jacksonville office, he specialized primarily in the
financial services industry. He currently serves on the Board of Directors of
the University of Florida Foundation, the Warrington College of Business
Advisory Council and the Fisher School of Accounting Steering Committee.
COREY J. COUGHLIN, age 51, is the Executive Vice President of the Company
and is the President, Chief Operating Officer and a member of the Board of
Directors of the Bank. Mr. Coughlin joined the Company in June of 1998. From
April 1997 until June 1998, Mr. Coughlin served as President and Chief Executive
Officer, and was a member of the Board of Directors of First Bankshares, Inc.
and as the President and Chief Executive Officer and as a member of the Board of
Directors of First National Bank of Central Florida (a wholly-owned subsidiary
of First Bankshares, Inc.). From February 1994 through April 1997, he served as
a member of the Board of Directors of SouthTrust Bank of Florida, Inc., which is
based in Jacksonville, and as Chairman of the Board of Directors, President and
Chief Executive Officer of SouthTrust Bank of Northeast Florida (a wholly-owned
subsidiary of SouthTrust Bank of Florida, Inc.). He has served as Chairman of
the Board of Directors of Bayfront Medical Center in St. Petersburg, Florida,
University Medical Center in Jacksonville, Florida, Leadership Jacksonville,
Gator Bowl Association in Jacksonville, Florida and for the Jacksonville Chamber
of Commerce. He also has served on the Board of Directors of the Florida Bankers
Association/Florida School of Banking, University of Florida in Gainesville,
Florida.
JOYCE BRUNER, age 45, has served, since the opening of the Bank in 1986, as
Vice President, Cashier, Senior Operations Officer, Senior Vice President and
Senior Administrative Officer, and most recently, Executive Vice President. She
also serves as Secretary of the Company. Prior to joining the Bank during its
organizational phase, Ms. Bruner served as Operations Officer for NationsBank of
Lake City (and its predecessors) for a period of three years where she had
responsibility for bank operations. Ms. Bruner has twenty-two years of banking
experience.
MARTHA S. WILLIAMS, age 48, has served as Senior Vice President and Cashier
of the Bank since July, 1997. From 1991 through 1997, Ms. Williams was Vice
President and Cashier of the Bank. From 1988 through 1991, Ms. Williams was
Cashier for Citizens Bank of Live Oak, which merged into the Bank in November
1992. From 1986 to 1988, Ms. Williams served as Assistant Cashier for the Bank
and prior to 1986 held management positions with NationsBank of Live Oak (and
its predecessors). Ms. Williams has thirty-one years of banking experience.
LLOYD D. ADAMS, age 51, serves as the Central Division President of the
Bank. Prior to joining the Company in May 1998, Mr. Adams served as the
Executive Vice President/Senior Corporate Banker for Barnett Bank, North Central
Florida from November 1996 until January 1998. He served as Senior Credit Policy
Officer with Barnett from 1992 through 1996. Mr. Adams has a strong background
in retail and business banking and credit policy, from both a small community
bank and large corporate bank perspective. He has been in the banking industry
for twenty-four years.
ROBERT E. CAMERON, age 54, serves as the Southern Division President of the
Bank. Prior to joining the Company in April 1998, Mr. Cameron was a Senior Vice
President of Barnett Bank of Alachua County. He also was a member of the Board
of Directors of United Gainesville Community Development Board. He has worked in
the banking industry for thirty years.
JOHN D. KENNEDY, age 42, has served as the Eastern Division President of the
Bank since August 1998. From 1996 through 1998, Mr. Kennedy was the President of
the Bank's Macclenny branch. From October 1973 until August 1996 he was with The
Citizens Bank of Macclenny, where he served as President since January 1987. He
is also a member of the Board of Directors of Baker County Hospital Authority,
Baker County Council on Aging and Baker County Tip-Off Club. Mr. Kennedy has 25
years of banking experience.
53
<PAGE>
SUZANNE M. NORRIS, age 34, has served as Senior Vice President and Senior
Credit Administrator since July, 1997. Ms. Norris came to the Bank in September,
1996 with 11 years of banking experience, working in various management and
lending positions with NationsBank in St. Petersburg, Tampa and Lake City,
including acting as Vice President of the Lake City offices from April 1993
until June 1995, and as Commercial Market Manager/Senior Banking Executive from
June 1995 to September 1996. Ms. Norris, a graduate of the University of
Florida, earned a Bachelor of Science degree, with a double major in Finance and
Management. Ms. Norris has been active in the community, currently serving as
the President of the Lake City/Columbia County Chamber of Commerce. She serves
on the Board of Directors for the United Way of Suwannee Valley and Epiphany
Catholic School and is a member of Altrusa.
THOMAS R. ANDREWS, age 52, was elected to the Board of Directors of the
Company in March 1994 and serves on the Compensation and Audit Committees of the
Company's Board of Directors. Mr. Andrews previously served as Chairman of the
Board of Directors for the former Bradford Bankshares, Inc. He is the owner of
Belco Enterprises, a commercial real estate company. Mr. Andrews is a member of
the Children's Home Society Foundation of Florida.
AUDREY S. BULLARD, age 55, was elected to the Board of Directors of the
Company in 1987 and serves on the Executive and Compensation Committees of the
Company's Board of Directors, and on the Investment, Marketing, Audit and
Executive Committees of the Bank's Board of Directors. Ms. Bullard is a
long-time resident of Lake City and is a native of the Northeast Florida area. A
practicing certified public accountant, Ms. Bullard is an officer and part owner
of Bullard Development Co. and A & R of Lake City, as well as several
partnerships and land development firms. Ms. Bullard has been active in numerous
civic and service organizations, including the Chamber of Commerce, the Lake
Shore Hospital, the Advent Christian Advisory Board, the Columbia County Public
School Foundation, the Lake City/Columbia County Beautification Board, the North
Florida Advisory Council and the Santa Fe Health Care, Inc. Board.
RAYMON LAND, Sr., age 58, was elected to the Board of Directors of the
Company in August 1988 and serves on the Audit Committee of the Company's Board
of Directors and on the Marketing Committee of the Bank's Board of Directors. He
has served in the past as President of the National Watermelon Association. He
has been in the watermelon producing business for 36 years. Mr. Land is also
presently President of Land Truck Brokers, Inc., and serves as a Director of
Melon Pac, Inc. In addition, Mr. Land serves on various committees in an
advisory capacity which serve as liaison between the Department of Agriculture
and the produce industry. Mr. Land is also a member of several horse
associations and is a real estate salesman for Land Brokerage Realty.
MARVIN H. PRITCHETT, age 64, was elected to the Board of Directors of the
Company in 1988 and serves on the Executive and Compensation Committees of the
Company's Board of Directors and on the Executive and Audit Committees of the
Bank's Board of Directors. Mr. Pritchett resides in Lake Butler, Florida, where
he is a self-employed business owner and investor. Since 1981, he has owned
Pritchett Trucking, Inc., a trucking and hauling firm, of which he also serves
as CEO, and Pritchett, Inc., a timber firm. He is also in the business of
hauling and selling rock materials through his companies, Bulldog Truck Lines,
Inc., and GP Materials, Inc., and is owner of the MH Pritchett Farm in Lake
Butler, a cattle operation. Mr. Pritchett is also CEO of Pritchett Investment
Group which owns Mack Truck dealerships in Jacksonville, Tampa and Orlando,
Florida.
WILLIAM STREICHER, age 62, was elected to the Board of Directors of the
Company in 1990 and serves on the Audit and Compensation Committees of the
Company's Board of Directors and on the Investment Committee of the Bank's Board
of Directors. He has owned and operated several McDonald's restaurant franchises
in the Company's primary service area and also has served on the board of Ronald
McDonald House Charities at Shands Hospital in Gainesville, Florida for over ten
years. He is past chairman and a past board member of the Lake City Community
College Foundation, a past member of the Lake City Rotary Club, past Vice
President of McDonald's Owner/Operator Advertising Co-Operative and a past
representative to the McDonald's Advertising Advisory Board of the State of
Florida.
54
<PAGE>
DIRECTOR COMPENSATION
Directors are paid $300 for each Board meeting and $150 for each committee
meeting that they attend. In addition, non-management directors may receive
non-qualified stock options in accordance with the Performance Based Incentive
Plan.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation for services
rendered to the Company in all capacities paid or accrued for the fiscal years
ended December 31, 1997, 1996 and 1995 to the Company's Chief Executive Officer
who is the only executive officer of the Company whose aggregate cash and cash
equivalent forms of compensation exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------------
------------------------------------------------ SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITIONS YEARS SALARY BONUS COMPENSATION OPTIONS GRANTED COMPENSATION
- ----------------------------- --------- ---------- ---------- ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
K.C. Trowell................. 1997 $ 172,500 $ 122,647 -- 34,000 $ 7,405(1)
Chairman and CEO of the 1996 150,000 106,650 -- -- 6,920
Company and the Bank 1995 136,980 67,500 -- -- 4,500
</TABLE>
- ------------------------
(1) Matching contribution to 401(k) of $4,750 and payment of premium for Group
Term Life Insurance of $2,655.
In order to accommodate its expansion, in mid-1998 the Company hired Corey
J. Coughlin to fill the positions of Executive Vice President of the Company and
President and Chief Operating Officer of the Bank. As compensation, Mr. Coughlin
receives an annual salary of $165,000 and a guaranteed bonus of $66,000, plus
reimbursement for relocation and certain other expenses.
The Company also hired G. Thomas Frankland in November 1998 to serve as
Executive Vice President and Chief Financial Officer of the Company and the
Bank. Mr. Frankland receives a base annual salary of $185,000, plus a potential
bonus targeted at 50% of his annual base salary, contingent upon the attainment
of certain performance goals, and a $35,000 signing bonus.
In addition, the Company also hired Robert Cameron in 1998 to act as
President of the Southern Division at an annual salary of $75,000, plus a
signing bonus of $25,000, and Lloyd Adams to act as President of the Central
Division at an annual salary of $90,000, plus a potential bonus of $18,000.
EMPLOYMENT AGREEMENTS
MR. TROWELL'S EMPLOYMENT AGREEMENT. The Company has entered into an
employment agreement with K.C. Trowell (the "Trowell Agreement") which provides
that Mr. Trowell will serve as the Chairman and Chief Executive Officer of the
Company. The Trowell Agreement has a rolling three year term, provided
Mr.Trowell's employment term ends on the first day of the month following his
70th birthday. The Trowell Agreement provides for an annual base salary of
$250,000, participation in the Performance-Based Incentive Plan, and
participation in the Company's various incentive, savings, retirement and
welfare benefit plans. Mr. Trowell also is eligible to receive an annual bonus
targeted at 50% of his annual base salary. The Company also granted Mr. Trowell
options to purchase 80,000 shares of Common Stock at a price of $8.00 per share,
20,000 of which vested upon issuance and 20,000 of which vest on December 10 of
each of the next three succeeding years. The Company also granted Mr. Trowell
7,500 shares of restricted stock, 3,750 of which vest and become nonforfeitable
on the first anniversary of the Trowell Agreement, and 1,875 of which vest and
become nonforfeitable on each of the next two succeeding anniversaries. The
Company also agreed to provide Mr. Trowell with a company car. The Trowell
Agreement also contains a noncompetition provision. In the event Mr. Trowell's
employment is terminated by the Company for a reason other than for cause, death
or disability, or if Mr. Trowell terminates his employment for good
55
<PAGE>
reason (as defined in the Trowell Agreement) then the Company must pay Mr.
Trowell a lump sum equal to (i) the amount of any earned but unpaid salary and
bonus, deferred compensation and vacation pay, plus (ii) an amount equal to 50%
the sum of Mr. Trowell's annual base salary and highest annual bonus from the
date of termination until the end of the employment period. In the event the
Company terminates Mr. Trowell's employment without cause, or if Mr. Trowell
terminates his employment for good reason, within two years of a change of
control of the Company, then the Company will pay Mr. Trowell 100% of the amount
referred to in (ii) above. In addition, all options to acquire shares of Common
Stock and all restricted stock previously granted to Mr. Trowell immediately
become vested and non-forfeitable upon a change in control.
MR. FRANKLAND'S EMPLOYMENT AGREEMENT. The Company has entered into an
employment agreement with G. Thomas Frankland (the "Frankland Agreement") which
provides that Mr. Frankland will serve as the Executive Vice President and Chief
Financial Officer of the Company. The Frankland Agreement provides for an annual
base salary of $185,000, participation in the Performance-Based Incentive Plan,
and participation in the Company's various incentive, savings, retirement and
welfare benefit plans. Mr. Frankland also received a signing bonus of $35,000
and is eligible to receive an annual bonus targeted at 50% of his annual base
salary. The Company also agreed to grant Mr. Frankland options to purchase
40,000 shares of Common Stock at a price of $8.00 per share, 20,000 of which
vest one year from the first anniversary of the Frankland Agreement, and 10,000
of which vest in each of the next two succeeding anniversary dates. The Company
also agreed to grant Mr. Frankland 5,000 shares of restricted stock, 2,500 of
which vest and become nonforfeitable on the first anniversary of the Frankland
Agreement and 2,500 of which vest and become nonforfeitable on the second
anniversary of the Frankland Agreement. The Frankland Agreement is substantially
similar to the Trowell Agreement.
EMPLOYEE BENEFITS
PERFORMANCE BASED INCENTIVE PLAN. In order to attract and retain qualified
personnel, in April 1998 the Board of Directors and shareholders of the Company
adopted the Performance-Based Incentive Plan (the "Plan"). The Plan establishes
the types of objectives used to measure and compensate for annual and long-term
performance. The Plan also allows for the reservation for future issuance of a
total of 540,000 shares of common stock, of which not more than 140,000 shares
may be used for restricted stock awards. The Plan is designed to motivate
officers, senior management, key employees and directors of the Company to
continue their efforts to improve the success and the growth of the Company and
to encourage them to remain with the Company.
The Plan provides for performance-based cash incentive awards to officers
and senior management of the Company and the Bank. In order to ensure that
management's rewards are aligned with shareholder interests, the grant of these
awards will be dependent upon the Company's meeting certain financial goals
established in advance by the Board of Directors. Additionally, the Plan will
provide for the grant of incentive and non-qualified stock options, stock
appreciation rights, performance units and/or restricted stock awards to key
employees of the Company and the Bank, and non-qualified stock options to the
Company's non-management directors. The inclusion in the Plan of various types
of long-term incentives does not mean that those incentives will necessarily be
awarded. Rather, various types of incentives are included so that the Company
will have the flexibility to tailor awards in the future in a fashion that will
best motivate the recipients. Decisions regarding the award of incentives are
made by the Compensation Committee of the Board of Directors, which consists of
five outside directors, none of whom has ever been an employee of the Company or
the Bank.
The Board of Directors of the Company may amend or terminate the Plan at any
time. However, certain amendments may not be adopted without the approval of the
shareholders, including any amendments that would increase the total number of
shares issuable under the Plan, alter the class of eligible employees or cause
awards under the Plan to no longer comply with Rule 16b-3 of the Exchange Act or
any other federal or state statutory or regulatory requirements.
56
<PAGE>
During 1997, options were granted to the following named executive officers:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SHARES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($ SHARE) DATE
- ---------------------------------------------- ------------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C>
K.C. Trowell.................................. 34,000 100% $ 7.00 (1)
</TABLE>
- ------------------------
(1) Options become exercisable in the amount of 6,800 options annually beginning
November 1, 1997 and continuing each year until November 1, 2001, with
corresponding expiration dates beginning November 1, 2007 and continuing
each year until November 1, 2011.
The table below provides information on exercise of options during 1997 by
executive officers and information with respect to unexercised options held by
the named executive officers at September 30, 1998.
<TABLE>
<CAPTION>
INTRINSIC VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED VALUE OPTIONS (#) OPTIONS
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---------------------------- ------------------- ----------------- ----------------------- ---------------------------
<S> <C> <C> <C> <C>
K.C. Trowell................ -- -- 104,684/36,432 $ 322,903/$16,618
</TABLE>
- ------------------------
(1) Based on a market value of $7.00 per share
401(K) PROFIT SHARING PLAN. The Company sponsors a 401(k) profit-sharing
plan in which substantially all full-time employees are eligible to participate.
This plan allows eligible employees to save portions of their salaries on a
pretax basis. Contributions to the plan are discretionary.
CERTAIN TRANSACTIONS
Certain directors and executive officers of the Company and their associates
are customers of the Bank and it is anticipated that they will continue to be
customers of the Bank in the future. All transactions between the Bank and
directors, executive officers, and their associates were made in the ordinary
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and in the opinion of management did not involve more than the
normal risk of collectability or present other unfavorable features. At
September 30, 1998, loans to directors and executive officers aggregated
approximately $3.1 million, representing 10.1% of shareholders' equity. All
loans to directors and executive officers must be approved by disinterested
members of the Board of Directors of the Bank.
57
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of shares of the Common Stock as of December 10, 1998 and as adjusted
to reflect the sale of shares offered hereby, with respect to each director of
the Company and each person, including any "group" as that term is used in
Section 13(d)(3) of the Exchange Act, who is known by the Company to own
beneficially more than 5% of the outstanding shares of common stock. Unless
otherwise indicated, each shareholder has sole voting and investment power with
respect to the indicated shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES OWNED BENEFICIALLY
OFFERING (1) AFTER THE OFFERING
----------------------- -------------------------
NAME NUMBER PERCENT PERCENT
- ------------------------------------------------------------ ---------- ----------- -------------------------
<S> <C> <C> <C>
Thomas R. Andrews........................................... 206,000(2) 4.09% 3.27%
Audrey S. Bullard........................................... 208,688(3) 4.14 3.32
Raymon Land, Sr............................................. 100,074(4) 1.98 1.59
Marvin H. Pritchett......................................... 792,576(5) 15.72 12.60
Paul M. Riherd.............................................. 297,828(6) 5.91 4.73
K.C. Trowell................................................ 329,562(7) 6.54 5.24
William Streicher........................................... 141,842(8) 2.81 2.25
---------- ----- -----
Total................................................... 2,076,570 41.19% 33.00%
</TABLE>
- ------------------------
(1) Pursuant to the rules of the Commission, the determinations of "beneficial
ownership" of Common Stock are based upon Rule 13d-3 under the Exchange Act,
which provides that shares will be deemed to be "beneficially owned" where a
person has, either solely or in conjunction with others, the power to vote
or to direct the voting of shares and/or the power to dispose, or to direct
the disposition of shares or where a person has the right to acquire any
such power within 60 days after the date such "beneficial ownership" is
determined. Shares of Common Stock that a beneficial owner has the right to
acquire within 60 days pursuant to the exercise of stock options or warrants
are deemed to be outstanding for the purpose of computing the percentage
ownership of such owner but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Includes currently exercisable options to purchase 2,000 shares.
(3) Includes 2,000 shares transferred to a revocable trust for benefit of her
daughter and currently exercisable options to purchase 2,000 shares.
(4) Includes currently exercisable options to purchase 2,000 shares.
(5) Includes 97,126 shares owned by New River Developers, 113,702 shares owned
by Pritchett Trucking, Inc., 57,692 shares owned by Mid-Florida Hauling,
Inc., 40,938 shares owned by Bulldog Trucking and 29,148 shares owned by Mr.
Pritchett's wife. Mr. Pritchett shares voting and investment power with
respect to all such shares. Also includes currently exercisable options to
purchase 2,000 shares.
(6) Includes 80,716 shares owned by Mr. Riherd's wife with respect to which he
shares voting and investment power.
(7) Includes 50,000 shares owned by Mr. Trowell's wife with respect to which he
shares voting and investment power. Also includes 131,484 shares underlying
options that are currently exercisable (6,800 and 20,000 that became
exercisable on November 1, 1998 and December 10, 1998, respectively) and
4,616 shares underlying options that become exercisable on December 31,
1998.
(8) Includes currently exercisable options to purchase 2,000 shares.
58
<PAGE>
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, par value $.01 per share, and 500,000 shares of Preferred Stock,
par value $.01 per share. As of September 30, 1998, there were issued and
outstanding 4,856,770 shares of Common Stock and no shares of Preferred Stock.
Since the Company is a holding company, the right of the Company, and hence
the right of creditors and shareholders of the Company, to participate in any
distribution of assets of any subsidiary upon its liquidation or reorganization
or otherwise is necessarily subject to the prior claims of creditors of the
subsidiary, except to the extent that claims of the Company itself as a creditor
of the subsidiary may be recognized. The principal source of the Company's
revenues is dividends from the Bank.
The following summary does not purport to be complete and is subject to in
all respects to, and qualified in its entirety by, the applicable provisions of
the Florida Business Corporation Act, the Company's Amended and Restated
Articles of Incorporation, and the Second Amended and Restated Bylaws of the
Company.
COMMON STOCK
The holders of the Common Stock are entitled to receive dividends from funds
legally available therefor when, as, and if declared by the Company's Board of
Directors, and are entitled upon liquidation to receive pro rata the net assets
of the Company after satisfaction in full of the prior rights of creditors and
senior shareholders of the Company. Under the Florida Business Corporation Act,
dividends are payable out of surplus only, and may be declared and paid by the
Company except when the Company currently is insolvent or would thereby be made
insolvent. The principal source of funds for payment of dividends by the Company
is dividends paid by the Bank.
The holders of Common Stock are entitled to one vote for each share held on
all matters as to which shareholders are entitled to vote. The holders of Common
Stock do not have cumulative voting rights, or preferential, subscriptive or
preemptive rights with respect to any securities or the Company, or any
conversion rights. The Common Stock is not subject to redemption. The
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
There are currently no shares of Preferred Stock issued or outstanding. The
Board of Directors of the Company has the authority, by a resolution of the
Board of Directors, to divide the authorized Preferred Stock into one or more
series. The Board of Directors may fix and determine the following relative
rights and preferences of each established series: (1) the rate and manner of
payment of dividends; (2) whether shares may be called or redeemed and, if so,
the call redemption price and the terms and conditions of the call or
redemption; (3) the amount payable upon shares in the event of voluntary or
involuntary liquidation; (4) sinking fund provisions, if any, for the call or
redemption of shares; (5) terms and conditions, if any, upon which the shares
may be converted into another class or series; and (6) voting rights, if any.
Prior to the issue of any shares of a series of Preferred Stock, the Company
must file with the Florida Department of State a statement setting forth the
name of the Company, the date of the adoption of the resolution establishing the
series and enclosing a copy of the resolution determining the relative rights
and preferences thereof, together with a statement that the resolution was duly
adopted by the Board of Directors. Upon the filing of such statement, the
resolution establishing and designating the series and fixing and determining
the relative rights and preferences of the series shall constitute an amendment
to the Articles of Incorporation of the Company.
59
<PAGE>
Any issuance of Preferred Stock could be used to dilute the stock ownership
of a person seeking to gain control of the Company and could otherwise have the
effect of delaying, deferring or preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company Common Stock is SunTrust
Bank, Atlanta.
UNDERWRITING
The Underwriters named below have severally agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriters, subject to the
terms and conditions of the Underwriting Agreement between the Underwriters and
the Company, the number of shares of Common Stock set forth opposite the names
of each underwriter below:
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
---------------------- -----------------
<S> <C>
Ryan, Beck & Co............................................................ 625,000
Allen C. Ewing & Co........................................................ 625,000
Total...................................................................... 1,250,000
-----------------
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares offered hereby, if any are purchased. The Company has
been advised that the Underwriters propose initially to offer the shares to the
public at the offering price set forth on the cover page of this Prospectus and
to certain selected dealers, including the Underwriters, at such price less a
concession not in excess of $0.40 per share. The public offering price and
concession may be changed after the initial offering to the public. The
Underwriters have informed the Company that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
The Underwriting Agreement provides for indemnification among the Company
and the Underwriters against certain liabilities in connection with this
offering, including liabilities under the Securities Act.
All of the executive officers and directors of the Company, and shareholders
owning in excess of 5% of the outstanding shares, have agreed that, for a period
of 180 days after the execution of the Underwriting Agreement, they will not,
without prior written consent, directly or indirectly, offer for sale or sell,
contract to sell, or grant any option to sell (including, without limitation,
any short sale), pledge, establish an open "put-equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, transfer, assign or otherwise
dispose of any of its shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock, or any option, warrant or other right
to acquire such shares, or publicly announce the intention to do any of the
foregoing. See "Shares Eligible for Future Sale."
The Company has granted to the Underwriters an option, exercisable during a
30 day period after the date of this Prospectus, to purchase up to 187,500
additional shares of Common Stock at the same price per share as the Company
receives for the 1,250,000 shares offered hereby, for the sole purpose of
covering over-allotments, if any. To the extent that the Underwriters exercise
such option, each Underwriter will be committed, subject to certain conditions,
to purchase a number of the additional shares of Common Stock proportionate to
each Underwriter's initial commitment.
Ryan, Beck & Co. and Allen C. Ewing & Co. have indicated an intention to
make a market in the shares of Common Stock as permitted by applicable law and
regulations. Any such market making may be discontinued at any time at the sole
discretion of such firms.
Prior to this Offering, there has been no public market for the Common
Stock. The public offering price will be determined by negotiation between the
Company and the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions and the Company's present and
historical results of operations, the capital structure of the Company, the
market price of the Common Stock, the number of shares being sold, the price
earnings multiplier of publicly traded common stock of comparable companies, the
Company's business potential, cash flow and earnings prospects and other
60
<PAGE>
factors deemed relevant. There can be no assurance that an active trading market
will develop for the Common Stock, that purchasers in the Offering will be able
to sell their shares at or above the Offering Price, or as to the price at which
the Common Stock may trade in the public market from time to time subsequent to
the Offering.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Overallotment involves syndicate sales in excess of the
offering size, which creates a syndicate short portion. Stabilizing transactions
permit bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transactions involve
purchases of the Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In "passive" market
making, market makers in the Common Stock who are Underwriters or prospective
underwriters or managers may, subject to certain limitations, make bids for or
purchases of the Common Stock until the time, if any, at which a stabilizing bid
is made. Penalty bids permit the Underwriters to reclaim a selling concession
from a participant in the distribution when shares of Common Stock originally
sold by such participant are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or otherwise,
and if commenced, may be discontinued at any time.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF
THE COMMON STOCK, THE PURCHASE OF COMMON STOCK TO COVER SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. THESE ACTIVITIES ARE DESCRIBED ABOVE.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by the Company are
incorporated, as of their respective filing dates, by reference in this
Prospectus.
(a) the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997; and
(b) the Company's Quarterly Reports on Form 10-QSB for the quarters ended
September 30, 1998, June 30, 1998, and March 31, 1998; and
(c) the Company's Current Report on Form 8-K dated August 10, 1998;
(d) the Company's Proxy Statement on Schedule 14A dated April 14, 1998; and
(e) the Company's Registration Statement on Form S-8 filed with the
Commission on December 7, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of the offering of the Common Stock offered hereby shall be deemed
to be incorporated herein by reference and to be a part hereof from the filing
date of such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated herein by reference shall be deemed to
be modified or superseded for purposes hereof to the extent that a statement
contained herein or in any other subsequently filed document which also is, or
is deemed to be, incorporated herein by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part hereof, except as so modified or superseded.
61
<PAGE>
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER TO WHOM THIS PROSPECTUS IS DELIVERED, ON THE REQUEST OF SUCH
PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS DESCRIBED ABOVE UNDER
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
SUCH DOCUMENTS). REQUESTS SHOULD BE DIRECTED TO:
CNB, INC.
201 NORTH MARION STREET
LAKE CITY, FLORIDA 32055
(904) 755-3240
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by McGuire, Woods, Battle & Boothe LLP, Jacksonville, Florida. Certain
legal matters will be passed upon for the Underwriters by Holland & Knight, LLP.
EXPERTS
RECENT CHANGE IN ACCOUNTING FIRMS
On October 24, 1997 the Company engaged Arthur Andersen LLP as the Company's
principal independent certified public accountants. Prior to Arthur Andersen
LLP's engagement, Osburn, Henning and Company (Orlando, Florida) ("Osburn,
Henning"), independent certified public accountants, had served as the principal
independent accountants for the Company and rendered its report with respect to
the Company's Financial Statements for the years ended December 31, 1996 and
1995. The recommendation to discontinue the engagement of Osburn, Henning was
made by management of the Company and was approved by the Board of Directors
effective October 24, 1997.
In the two most recent fiscal years preceding Arthur Andersen LLP's
engagement, there were no disagreements with Osburn, Henning on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to Osburn, Henning satisfaction,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report. Osburn, Henning reports on the
Company's Financial Statements for such fiscal years did not contain any adverse
opinion or disclaimer of opinion, nor were such reports modified or qualified in
any respect.
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP and Osburn,
Henning, independent certified public accountants, and are included herein in
reliance upon the authority of said firms as experts in giving said reports.
62
<PAGE>
CNB, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants--Arthur Andersen LLP.................................... F-1
Report of Independent Certified Public Accountants--Osburn, Henning and Company............................ F-2
Consolidated Statements of Financial Condition as of December 31, 1996
and 1997................................................................................................. F-3
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997......................................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997............................................................................................ F-6
Notes to Consolidated Financial Statements for the years ended December 31, 1995,
1996 and 1997............................................................................................ F-7
Consolidated Statement of Financial Condition as of September 30, 1998 (unaudited)......................... F-24
Consolidated Statements of Income for the nine months ended September 30, 1997
and 1998 (unaudited) and for the three months ended September 30, 1997
and 1998 (unaudited)..................................................................................... F-25
Consolidated Statement of Shareholders' Equity for the nine months ended
September 30, 1998 (unaudited)........................................................................... F-27
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997
and 1998 (unaudited) and for the three months ended September 30, 1997
and 1998 (unaudited)..................................................................................... F-28
Notes to Consolidated Financial Statements for the nine months ended September 30, 1998 (unaudited)........ F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To CNB, Inc.:
We have audited the accompanying consolidated statement of financial
condition of CNB, INC. (a Florida corporation) AND SUBSIDIARY as of December 31,
1997 and the related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of CNB, Inc. and subsidiary as of
December 31, 1996 and 1995 were audited by other auditors whose report dated
January 31, 1997 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNB, Inc. and subsidiary as
of December 31, 1997 and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
February 13, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders
CNB, Inc.
Lake City, Florida
We have audited the accompanying consolidated statements of financial
condition of CNB, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CNB, Inc.
and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
OSBURN, HENNING AND COMPANY
January 31, 1997
Orlando, Florida
F-3
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash and due from banks...................................................... $ 9,995,724 $ 12,789,396
Federal funds sold........................................................... 24,125,000 9,950,000
Interest-bearing deposits in other banks..................................... 5,735,902 140,986
-------------- --------------
Total cash and cash equivalents........................................ 39,856,626 22,880,382
INVESTMENT SECURITIES AVAILABLE FOR SALE......................................... 52,842,809 60,866,357
INVESTMENT SECURITIES HELD TO MATURITY........................................... 8,096,443 10,008,604
LOANS, NET....................................................................... 158,153,524 147,428,138
PREMISES AND EQUIPMENT, NET...................................................... 10,116,830 9,459,393
OTHER ASSETS..................................................................... 4,264,770 4,302,470
-------------- --------------
Total assets........................................................... $ 273,331,002 $ 254,945,344
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand............................................... $ 29,702,903 $ 33,201,517
Savings, NOW, and money market........................................... 78,308,184 79,111,428
Time, under $100,000..................................................... 90,276,133 90,533,210
Time, $100,000 and over.................................................. 33,156,438 23,977,814
-------------- --------------
Total deposits......................................................... 231,443,658 226,823,969
Securities sold under repurchase agreements.................................. 9,156,788 3,766,347
Notes payable................................................................ 1,450,000 2,650,000
Other Liabilities............................................................ 2,255,337 2,036,195
-------------- --------------
Total liabilities...................................................... 244,305,783 235,276,511
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 18)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares authorized, no shares issued
or outstanding............................................................. 0 0
Common stock, $.01 par value; 10,000,000 shares authorized, 4,856,770 and
3,875,810 shares issued and outstanding.................................... 48,568 38,758
Additional paid-in capital................................................... 19,465,132 12,663,222
Retained earnings............................................................ 9,256,327 6,901,006
Unrealized gain on securities available for sale, net of taxes............... 255,192 65,847
-------------- --------------
Total shareholders' equity............................................. 29,025,219 19,668,833
-------------- --------------
Total liabilities and shareholders' equity............................. $ 273,331,002 $ 254,945,344
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans..................................... $ 14,542,106 $ 11,187,824 $ 9,161,123
Interest on investment securities available for sale........... 3,560,172 2,615,265 837,321
Interest on investment securities held to maturity............. 489,445 653,748 2,291,192
Interest on federal funds sold................................. 720,380 612,765 435,955
Interest on interest-bearing deposits.......................... 107,904 20,078 20,091
------------- ------------- ------------
Total interest income...................................... 19,420,007 15,089,680 12,745,682
------------- ------------- ------------
INTEREST EXPENSE:
Interest on deposits........................................... 8,255,219 6,454,024 5,804,836
Interest on short-term borrowings.............................. 238,387 25,023 0
Interest on notes payable...................................... 169,235 132,506 161,467
------------- ------------- ------------
Total interest expense..................................... 8,662,841 6,611,553 5,966,303
------------- ------------- ------------
NET INTEREST INCOME.................................................. 10,757,166 8,478,127 6,779,379
PROVISION FOR LOAN LOSS.............................................. 440,000 335,000 230,000
------------- ------------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS.................... 10,317,166 8,143,127 6,549,379
------------- ------------- ------------
NONINTEREST INCOME:
Service charges................................................ 1,733,762 1,404,930 1,187,036
Other fees and charges......................................... 418,564 397,199 288,233
Gain (loss) on sale of securities.............................. 1,171 (24,945) 2,838
------------- ------------- ------------
Total noninterest income................................... 2,153,497 1,777,184 1,478,107
------------- ------------- ------------
NONINTEREST EXPENSE:
Salaries and employee benefits................................. 3,960,235 3,116,705 2,704,200
Occupancy and equipment expenses............................... 1,387,578 976,708 809,223
SAIF assessment................................................ 0 326,823 0
Other operating expenses....................................... 2,566,620 1,939,533 1,658,877
------------- ------------- ------------
Total noninterest expense.................................. 7,914,433 6,359,769 5,172,300
------------- ------------- ------------
INCOME BEFORE INCOME TAXES........................................... 4,556,230 3,560,542 2,855,186
INCOME TAXES......................................................... 1,580,779 1,247,261 1,013,930
------------- ------------- ------------
NET INCOME........................................................... $ 2,975,451 $ 2,313,281 $ 1,841,256
------------- ------------- ------------
------------- ------------- ------------
EARNINGS PER SHARE (NOTE 2):
Basic earnings per share....................................... $ 0.69 $ 0.67 $ 0.56
------------- ------------- ------------
------------- ------------- ------------
Average common shares.......................................... 4,327,534 3,478,248 3,279,466
------------- ------------- ------------
------------- ------------- ------------
Diluted earnings per share..................................... $ 0.68 $ 0.65 $ 0.55
------------- ------------- ------------
------------- ------------- ------------
Diluted average common shares and share equivalents............ 4,406,616 3,547,390 3,338,674
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS) TOTAL
---------------------- PAID-IN RETAINED ON INVESTMENT SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS SECURITIES EQUITY
---------- ---------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.......... 3,279,466 $ 32,794 $ 9,767,972 $ 3,420,252 $ (293,912) $ 12,927,106
Net income...................... 0 0 0 1,841,256 0 1,841,256
Cash dividends.................. 0 0 0 (295,151) 0 (295,151)
Change in unrealized gain on
investment securities
available for sale, net of
taxes......................... 0 0 0 0 280,685 280,685
---------- ---------- ------------- ------------ -------------- -------------
BALANCE, DECEMBER 31, 1995.......... 3,279,466 32,794 9,767,972 4,966,357 (13,227) 14,753,896
Net income...................... 0 0 0 2,313,281 0 2,313,281
Cash dividends.................. 0 0 0 (378,632) 0 (378,632)
Shares issued in connection with
an acquisition (Note 3)....... 596,344 5,964 2,895,250 0 0 2,901,214
Change in unrealized gain on
investment securities
available for sale, net of
taxes......................... 0 0 0 0 79,074 79,074
---------- ---------- ------------- ------------ -------------- -------------
BALANCE, DECEMBER 31, 1996.......... 3,875,810 38,758 12,663,222 6,901,006 65,847 19,668,833
Net income...................... 0 0 0 2,975,451 0 2,975,451
Cash dividends.................. 0 0 0 (620,130) 0 (620,130)
Issuance of common stock at $7
per share, net of offering
cost.......................... 968,960 9,690 6,744,405 0 0 6,754,095
Issuance of common stock for
option agreements, net of
repurchases................... 12,000 120 57,505 0 0 57,625
Change in unrealized gain on
investment securities
available for sale, net of
taxes......................... 0 0 0 0 189,345 189,345
---------- ---------- ------------- ------------ -------------- -------------
BALANCE, DECEMBER 31, 1997.......... 4,856,770 $ 48,568 $ 19,465,132 $ 9,256,327 $ 255,192 $ 29,025,219
---------- ---------- ------------- ------------ -------------- -------------
---------- ---------- ------------- ------------ -------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 2,975,451 $ 2,313,281 $ 1,841,256
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 828,065 579,686 504,784
Provision for loan losses.................................... 440,000 335,000 230,000
Investment securities amortization, net...................... 135,401 225,856 259,214
Deferred income tax benefit.................................. (30,582) (165,768) 124,129
Changes in assets and liabilities:
Other assets............................................... (246,147) 171,352 (448,592)
Other liabilities.......................................... 219,142 336,470 495,960
-------------- -------------- --------------
Net cash provided by operating activities................ 4,321,330 3,795,877 3,006,751
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale.......... (17,191,974) (17,629,662) (3,635,985)
Purchases of investment securities held to maturity............ 0 0 (14,547,968)
Proceeds from sales of investment securities available for
sale......................................................... 0 4,014,219 3,086,221
Proceeds from maturities of investment securities available for
sale......................................................... 25,417,052 10,266,445 13,047,405
Proceeds from maturities of investment securities held to
maturity..................................................... 1,877,318 3,185,437 11,616,850
Net increase in loans.......................................... (11,165,386) (21,773,508) (16,580,374)
Purchases of premises and equipment............................ (1,283,806) (1,427,233) (632,030)
Cash received related to acquisition, net of cash paid......... 0 214,372 0
-------------- -------------- --------------
Net cash used in investing activities.................... (2,346,796) (23,149,930) (7,645,881)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits....................................... 4,619,689 24,449,208 6,390,363
Net increase in securities sold under repurchase agreements.... 5,390,431 3,766,347 0
Borrowings under note payable.................................. 0 2,650,000 0
Repayment of note payable...................................... (1,200,000) (950,000) (750,000)
Redemption of subordinated debentures.......................... 0 (274,250) 0
Cash dividends................................................. (620,130) (378,632) (295,151)
Issuance of common stock in connection with rights offering.... 6,754,095 0 0
Issuance of common stock for option agreements................. 57,625 0 0
-------------- -------------- --------------
Net cash provided by financing activities................ 15,001,710 29,262,673 5,345,212
-------------- -------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................ 16,976,244 9,908,620 706,082
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................... 22,880,382 12,971,762 12,265,680
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR........................... $ 39,856,626 $ 22,880,382 $ 12,971,762
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND NATURE OF OPERATIONS
CNB, Inc. (the "Company") is a registered bank holding company incorporated
in Florida. The Company operates a wholly owned banking subsidiary, CNB National
Bank (the "Bank"), which is chartered as a national bank in Lake City, Florida.
The Bank is a member of the Federal Reserve System and conducts business from a
total of 11 offices in north Florida. The Company offers a full range of lending
and deposit products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company follows generally accepted accounting
principles and reporting practices applicable to the banking industry.
RECLASSIFICATIONS
Certain amounts and captions presented in the 1995 and 1996 financial
statements have been reclassified to conform to the 1997 presentation. Financial
statements and other information have been reclassified to conform to reflect
the two-for-one stock split effective August 17, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT SECURITIES
AVAILABLE FOR SALE
Securities available for sale represent investment securities which are used
for asset/liability, liquidity, and other funds that management purposes are
deemed to have indefinite holding periods. These securities are recorded at
fair value, with unrealized gain and losses, net of deferred income taxes,
recorded as a separate component of shareholders' equity.
HELD TO MATURITY
Securities held to maturity represent investment securities where the
Company's intent and ability is to hold to maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts.
Amortization and accretion of premiums and discounts are recognized as
adjustments to interest income. Realized gains and losses are recognized using
the specific identification method.
F-8
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND LOAN FEES
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan loss. Interest on substantially all loans other than installment loans
is calculated by using the simple interest method on daily balances of the
principal amounts outstanding. Interest on some installment loans is recognized
using the rule-of-78s method, the results of which are not materially different
than the interest method.
Loan fees, net of loan origination costs, are capitalized and amortized as
yield adjustments over the respective loan terms using a method which does not
differ significantly from the interest method. For 1997, 1996 and 1995 loan fees
included in interest and fees on loans amounted to $531,454, $410,033 and
$400,602 respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to income. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb inherent losses on existing loans that may become uncollectible based
on evaluations of the collectibility of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrowers' ability to pay.
Accrual of interest is discontinued on loans that are 90 days or more past due,
unless substantially collateralized and in the process of collection, or sooner
if, in the opinion of management, the borrower's financial condition is such
that collection of principal or interest is doubtful.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Maintenance and repairs are charged to expenses as
incurred. Gains and losses on dispositions are reflected in income.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired and the
write-down would be material, an assessment of recoverability is performed prior
to any write-down of the asset.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying amount or at
fair value, less cost to sell.
INTANGIBLES
The Company has intangible assets with carrying amounts of $1,556,689,
$1,725,854 and $928,000 at December 31, 1997, 1996 and 1995 respectively.
Intangible assets consist of core deposits and goodwill. Core deposit
intangibles are being amortized over a 10-year period using the straight-line
method. Goodwill is being amortized over a 15-year period on a straight-line
basis. Amortization of all intangible assets was $201,696, $158,465 and $150,862
for 1997, 1996 and 1995 respectively.
F-9
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Periodically, the Company reviews its intangible assets for events or
changes in circumstances that may indicate that the carrying amounts of the
assets are not recoverable.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
The Company and the Bank file consolidated federal and state income tax
returns. Under a tax-sharing arrangement, income tax charges or credits are
generally allocated to the Company and the Bank on the basis of their respective
taxable income or loss that is included in the consolidated income tax return,
as determined by the separate return method.
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. 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 (Note 15). 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 years ended
December 31, 1997, 1996 and 1995.
CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits in other banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods and
all items have an original maturity of 90 days or less. Cash paid for interest
was $8,308,219, $6,632,799 and $5,479,743 during 1997, 1996 and 1995
respectively, and cash paid for income taxes was $1,785,000, $1,247,912 and
$930,047 during 1997, 1996 and 1995 respectively.
3. ACQUISITION
On August 31, 1996, the Company acquired Riherd, Inc. ("Riherd") and its
wholly owned subsidiary bank, Farmers and Dealers Bank ("F&D") of Lake Butler,
Florida, which had assets of $48.0 million. F&D operated from its Lake Butler
headquarters and its two branch offices in Alachua County. The acquisition was
effected through the Company's issuance of 596,344 of its common shares valued
at approximately $2.9 million and the payment of approximately $2.7 million in
cash to Riherd's shareholders. As a part of this transaction, Riherd and F&D
were merged into the Company and the Bank, respectively.
The acquisition was accounted for by the Company as a purchase transaction
and resulted in goodwill of approximately $990,000. Goodwill is being amortized
over a 15-year period on a straight-line basis. Operating results of Riherd and
F&D after August 31, 1996 are included in the accompanying consolidated
statements of income.
F-10
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
4. INVESTMENT SECURITIES
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
U.S. U.S. STATE, MORTGAGE-
TREASURY GOVERNMENT COUNTY, AND BACKED
SECURITIES AGENCIES MUNICIPAL SECURITIES OTHER TOTAL
---------- ----------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Amortized cost................................ $26,947,111 1$4,667,695 $1,415,030 $8,018,219 $1,387,750 $52,435,805
Gross unrealized:
Gains....................................... 272,803 34,362 72,416 88,778 0 468,359
Losses...................................... (613) (17,965) 0 (42,777) 0 (61,355)
---------- ----------- ----------- --------- --------- ----------
Estimated fair value.......................... $27,219,301 1$4,684,092 $1,487,446 $8,064,220 $1,387,750 $52,842,809
---------- ----------- ----------- --------- --------- ----------
---------- ----------- ----------- --------- --------- ----------
</TABLE>
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
U.S. U.S. STATE, MORTGAGE-
TREASURY GOVERNMENT COUNTY, AND BACKED
SECURITIES AGENCIES MUNICIPAL SECURITIES OTHER TOTAL
---------- ----------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Amortized cost............................... $32,014,271 1$5,159,067 $1,662,660 $10,715,891 $1,209,450 $60,761,339
Gross unrealized:
Gains...................................... 154,666 13,862 100,814 78,597 0 347,939
Losses..................................... (58,280) (86,072) 0 (93,429) (5,140) (242,921)
---------- ----------- ----------- ---------- --------- ----------
Estimated fair value......................... $32,110,657 1$5,086,857 $1,763,474 $10,701,059 $1,204,310 $60,866,357
---------- ----------- ----------- ---------- --------- ----------
---------- ----------- ----------- ---------- --------- ----------
</TABLE>
Amortized cost and estimated fair value of investment securities held to
maturity, consisting of mortgage backed securities, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Amortized cost....................................................... $ 8,096,443 $ 10,008,604 $ 13,246,806
Gross unrealized:
Gains.............................................................. 6,073 9,224 34,666
Losses............................................................. (166,776) (295,945) (228,927)
------------ ------------- -------------
Estimated fair value................................................. $ 7,935,740 $ 9,721,883 $ 13,052,545
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
During 1997, no investment securities available for sale were sold. During
1996, investment securities available for sale with a carrying amount of
$4,039,164 were sold for $4,014,219, resulting in a loss of $24,945. During
1995, investment securities available for sale with a carrying amount of
$3,083,383 were sold for $3,086,221, resulting in a gain of $2,838.
Interest income earned on tax-exempt securities in 1997 and 1996 was $90,955
and $32,130. Dividends of $84,031 and $64,564 on stock of the Federal Reserve
Bank and the Federal Home Loan Bank are included in interest on investment
securities available for sale in 1997 and 1996, respectively.
F-11
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
4. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities at December 31,
1997, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES INVESTMENT SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- --------------------------
<S> <C> <C> <C> <C>
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------------- ------------- ------------ ------------
Due in:
One year or less..................................... $ 14,500,187 $ 14,514,531 $ 0 $ 0
After one through five years......................... 25,207,144 25,485,950 0 0
After five through ten............................... 2,714,505 2,743,925 0 0
Over ten years....................................... 608,000 646,433 0 0
Mortgage-backed securities and others................ 9,405,969 9,451,970 8,096,443 7,935,740
------------- ------------- ------------ ------------
$ 52,435,805 $ 52,842,809 $ 8,096,443 $ 7,935,740
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
At December 31, 1997, U. S. Treasury and Government agency securities with
an amortized cost of $18,775,758 and an estimated fair value of $19,015,305 were
pledged to secure public funds, treasury tax and loan deposits, and repurchase
agreements.
F-12
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND NONPERFORMING ASSETS
Loans at December 31 were comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Commercial, financial, and agricultural................................................... $ 69,238 $ 68,595
Real estate--construction................................................................. 3,336 4,029
Real estate--mortgage..................................................................... 68,561 56,787
Installment and consumer lines............................................................ 18,514 19,413
---------- ----------
Total loans, net of unearned discount................................................... 159,649 148,824
Less allowance for loan losses............................................................ (1,495) (1,396)
---------- ----------
Net loans............................................................................... $ 158,154 $ 147,428
---------- ----------
---------- ----------
</TABLE>
Activity in the allowance for loan losses account was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Balance beginning of year................................................ $ 1,395,899 $ 945,770 $ 827,052
Acquired in acquisition................................................ 0 370,195 0
Provision.............................................................. 440,000 335,000 230,000
Charge-offs............................................................ (407,811) (282,904) (170,478)
Recoveries............................................................. 67,253 27,838 59,196
------------ ------------ -----------
Balance at end of year................................................... $ 1,495,341 $ 1,395,899 $ 945,770
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
Loans on a nonaccrual basis totaled approximately $1,045,000 and $87,000 at
December 31, 1997 and 1996, respectively. Foregone interest which would have
otherwise been recorded on nonaccrual loans, including those loans that were
nonaccrual at sometime during the year and later paid, reinstated or charged
off, was approximately $51,000, $25,000 and $48,000 in 1997, 1996 and 1995,
respectively. In addition to nonaccrual loans, nonperforming assets include
other real estate owned, property acquired by foreclosure in settlement of debt.
Other real estate owned was $320,427 and $87,960 at December 31, 1997 and 1996,
respectively, and is included in other assets in the accompanying statements of
financial condition.
The Company recognizes income on impaired loans primarily on the cash basis.
Any change in the present value of expected cash flows is recognized through the
allowance for loan losses. Impaired loan information for the year ended December
31, 1997, is as follows:
<TABLE>
<S> <C>
Impaired loans with an allowance................................................ $ 811,725
Impaired loans without an allowance (1)......................................... 583,300
---------
Total impaired loans.......................................................... $1,395,025
---------
---------
Allowance for impaired loans.................................................... $ 266,513
---------
---------
Interest income recognized on impaired loans during the year.................... $ 72,954
---------
---------
</TABLE>
- ------------------------
(1) Impaired loans determined to be carried at or below fair value of the
underlying collateral and, as such, do not require an allowance.
F-13
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND NONPERFORMING ASSETS (CONTINUED)
The average balance of impaired loans during the year approximated $1
million.
6. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following components at
December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Building and improvements...................................... $ 8,251,202 $ 7,680,351
Equipment and furnishings...................................... 3,936,613 3,378,601
Land........................................................... 1,927,139 1,960,439
------------- -------------
14,114,954 13,019,391
Less accumulated depreciation.................................. (3,998,124) (3,559,998)
------------- -------------
$ 10,116,830 $ 9,459,393
------------- -------------
------------- -------------
</TABLE>
Depreciation was $626,369, $421,221 and $365,041 for 1997, 1996 and 1995,
respectively.
7. DEPOSITS
At December 31, 1997, the scheduled maturities of time certificates of
deposit are as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 94,419
1999.............................................................. 14,688
2000.............................................................. 10,695
2001.............................................................. 3,164
2002 and thereafter............................................... 467
---------
$ 123,433
---------
---------
</TABLE>
8. 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 1997 and 1996 was approximately $4,738,074 and $520,000,
respectively. Interest expense in 1997 and 1996 was $238,388 and $25,023,
respectively, resulting in an average rate paid of 5.03% in 1997 and 4.81% in
1996. The highest amount outstanding during 1997 and 1996 was $9,156,788 and
$5,035,000, respectively.
F-14
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
9. NOTES PAYABLE
The Company is indebted under the following notes payable at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Notes payable, collateralized by all issued and outstanding common stock of the Bank,
at prime less .50%, interest only payable monthly until September 1997, then
principal and interest payable monthly over a seven-year period..................... $ 1,450,000 $ 2,650,000
------------ ------------
------------ ------------
</TABLE>
On January 22, 1998, the Company paid off the notes payable.
The Company also has available lines of credit with certain other financial
institutions totaling $4,000,000. The amount outstanding as of December 31, 1997
is $0.
10. OTHER OPERATING EXPENSES
Components of other operating expenses are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Data processing...................................................................... $ 519 $ 298 $ 213
Postage and delivery................................................................. 336 219 193
Advertising and promotion............................................................ 257 237 166
Supplies............................................................................. 231 133 94
Amortization of intangible assets.................................................... 202 158 151
Telephone............................................................................ 185 105 94
Legal and professional............................................................... 158 134 84
Loan expense......................................................................... 135 120 91
Regulatory fees...................................................................... 119 176 302
Administrative....................................................................... 103 92 81
Other................................................................................ 322 268 190
--------- --------- ---------
$ 2,567 $ 1,940 $ 1,659
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company was notified during the third quarter of 1996 of the amount of
the FDIC's one-time special assessment based on the Company's Savings
Association Insurance Fund (SAIF)-assessable deposits. The assessment,
authorized by the Deposit Insurance Funds Act of 1996, applied to all banking
institutions with deposits insured by SAIF and amounted to $326,823 for the
Company.
F-15
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
11. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1997,
1996 and 1995 consisted of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................................... $ 1,438,319 $ 1,229,237 $ 789,801
State................................................................. 173,042 183,792 100,000
------------ ------------ ------------
Total............................................................... $ 1,611,361 $ 1,413,029 $ 889,801
------------ ------------ ------------
------------ ------------ ------------
Deferred:
Federal............................................................... $ (69,441) $ (149,193) $ 111,719
State................................................................. 38,859 (16,575) 12,410
------------ ------------ ------------
Total............................................................... $ (30,582) $ (165,768) $ 124,129
------------ ------------ ------------
------------ ------------ ------------
Total:
Federal............................................................... $ 1,368,878 $ 1,080,044 $ 901,520
State................................................................. 211,901 167,217 112,410
------------ ------------ ------------
Total............................................................... $ 1,580,779 $ 1,247,261 $ 1,013,930
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities and
their respective tax bases. Significant components of and the resultant deferred
tax assets and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.............................................. $ 513,099 $ 505,255
Unearned loan fees.................................................. 28,495 27,288
Unrealized gain on investment securities available for sale......... 151,813 39,172
---------- ----------
693,407 571,715
---------- ----------
Deferred tax assets:
Loan loss provisions................................................ 432,237 387,881
Intangible assets................................................... 79,829 58,945
Net operating loss carryover of acquiree............................ 0 27,138
Other items......................................................... 44,007 42,476
---------- ----------
556,073 516,440
---------- ----------
Net deferred tax liability............................................ $ 137,334 $ 55,275
---------- ----------
---------- ----------
</TABLE>
F-16
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
11. INCOME TAXES (CONTINUED)
The reasons for the differences between the statutory federal income tax
rate and the effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rates......................................................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income........................................... (2.3) (2.4) (2.4)
State income taxes, net............................................... 2.5 3.1 2.6
Nondeductible expenses................................................ 0.5 0.3 1.3
--- --- ---
34.7% 35.0% 35.5%
--- --- ---
--- --- ---
</TABLE>
12. LOANS TO RELATED PARTIES
Certain officers and directors, and companies in which they held a 10% or
more beneficial ownership, were indebted (or in some cases, guaranteed loans) to
the Bank. An analysis of such activities follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Balance, January 1.............................................. $ 2,032,728 $ 1,811,794
New loans and advances........................................ 4,425,130 2,904,192
Repayments (excluding renewals)............................... (2,008,093) (2,683,258)
------------- -------------
Balance, December 31............................................ $ 4,449,765 $ 2,032,728
------------- -------------
------------- -------------
</TABLE>
The loans analyzed above were made in the normal course of business at
prevailing interest rates and terms.
13. DIVIDEND RESTRICTIONS
The Company's primary source of funds is dividends it receives from the
Bank. The payment of dividends by the Bank, in turn, is subject to the
regulations of the Comptroller of the Currency, which require, among other
things, that dividends be paid only from net profits of the current and
immediately preceding two years. At December 31, 1997, the Bank had
approximately $2,189,000 of retained earnings available for dividends to the
Company without being required to seek special regulatory approvals.
14. EQUITY
DIVIDENDS DECLARED
During 1997, the Company declared cash dividends of $.03 per share for the
first and second quarters and $.04 per share for the third and fourth quarters.
COMMON STOCK
On July 15, 1997, the Company issued 968,960 shares of common stock at $7
per share.
F-17
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
15. STOCK OPTIONS
Key officers of the Company have been granted incentive stock options to
purchase the Company's common stock. Generally, the options become exercisable
20% in each year following the year of grant, and expire ten years after the
date they first become exercisable. The grant price of all options has been
equal to the estimated fair market value of a share of stock as of the date of
grant.
The Company has chosen to continue to account for its options under the
provisions of Accounting Principles Board Statement No. 25, "Accounting for
Stock Issued to Employees," and thus has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation."
As of January 1, 1997, 143,016 options were outstanding. During the year,
14,550 options were exercised (12,000 options at $5 and 2,550 options at $4) and
34,000 new options were granted (at $7). Eight hundred fifty options were
forfeited and no options expired during 1997. Of the 160,766 options outstanding
at December 31, 1997, 115,374 are fully vested and exercisable as of December
31, 1997. No options were exercised, granted, forfeited or expired during 1996.
The following table summarizes information about stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- ----------------------
AVERAGE AVERAGE
EXERCISE AVERAGE EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- ---------------------------------------------------------- --------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$3.06--$3.64.............................................. 49,226 1.80 $ 3.22 49,226 $ 3.22
$4.00--$4.68.............................................. 67,108 4.27 4.14 58,148 3.78
$5.20--$7.00.............................................. 44,432 5.75 6.57 8,000 6.70
--------- --- ----- --------- -----
Total................................................... 160,766 3.93 $ 4.53 115,374 $ 3.94
--------- --- ----- --------- -----
--------- --- ----- --------- -----
</TABLE>
Under SFAS No. 123, the Company would be required to disclose the effect of
all awards granted in fiscal years that begin after December 15, 1994. The
Company did not grant any options during 1995 or 1996. On November 1, 1997,
34,000 options were granted at the fair market value of the stock on November 1,
1997 (estimated at $7).
16. EMPLOYEE BENEFITS
PROFIT-SHARING PLAN
The Company sponsors a 401(k) profit-sharing plan in which substantially all
full-time employees are eligible to participate. This plan allows eligible
employees to save portions of their salaries on a pretax basis. Contributions to
the plan are discretionary. Contributions and administrative expenses related to
the plan totaled $84,343 and $54,650 for the years ended December 31, 1997 and
1996, respectively.
HEALTH AND WELFARE PLAN
The Company also provides health care and life insurance benefits to all
employees through Florida Bankers Insurance Trust. Total cost related to these
benefits for 1997 and 1996 were $319,417 and $268,626, respectively.
F-18
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
17. CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's 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 Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined) and
of Tier I capital (as defined) to average assets (as defined). If such minimum
amounts and ratios are met, the Bank is considered "adequately capitalized." If
a bank exceeds the requirements of "adequately capitalized" and meets even more
stringent minimum standards, it is considered to be "well capitalized."
Management believes that as of December 31, 1997 and 1996, the Bank meets and
exceeds all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Bank's
regulatory agency categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. There have been no conditions
or events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted assets):
Consolidated.......................................... $ 28,708 18.7% $ 12,306 8.0% $ 15,383 10.0%
Bank.................................................. 22,868 14.8 12,387 8.0 15,484 10.0
Tier I capital (to risk-weighted assets):
Consolidated.......................................... 27,213 17.7 6,153 4.0 9,230 6.0
Bank.................................................. 21,373 13.8 6,194 4.0 9,291 6.0
Tier I capital (to average assets):
Consolidated.......................................... 27,213 10.2 10,671 4.0 13,339 5.0
Bank.................................................. 21,373 8.0 10,670 4.0 13,338 5.0
As of December 31, 1996:
Total capital (to risk-weighted assets):
Consolidated.......................................... 19,267 13.6 11,352 8.0 14,189 10.0
Bank.................................................. 21,538 15.2 11,347 8.0 14,183 10.0
Tier I capital (to risk-weighted assets):
Consolidated.......................................... 17,871 12.6 5,676 4.0 8,514 6.0
Bank.................................................. 20,142 14.2 5,673 4.0 8,510 6.0
Tier I capital (to average assets):
Consolidated.......................................... 17,871 7.3 9,856 4.0 12,320 5.0
Bank.................................................. 20,142 8.2 9,855 4.0 12,319 5.0
</TABLE>
F-19
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
18. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The financial statements do not reflect various commitments and contingent
liabilities, or off-balance sheet risks, that arise in the normal course of
business to meet the financing needs of customers. These include commitments to
extend credit and to honor standby letters of credit. These instruments involve,
to varying degrees, elements of credit, interest rate, and liquidity risks in
excess of amounts reflected in the balance sheets. The extent of the Bank's
involvement in these commitments or contingent liabilities is expressed by the
contractual, or notional, amounts of the instruments.
The Company's maximum exposure to credit loss under standby letters of
credit and commitments to extend credit is represented by the contractual amount
of those instruments. The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained, if any, is based on
management's credit evaluation in the same manner as though an immediate credit
extension were to be granted. Commitments to extend credit amount to $12,211,426
and $12,355,074 at December 31, 1997 and 1996, respectively.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities. The Company had $1,550,622 and $232,000 of standby
letters of credit outstanding at December 31, 1997 and 1996, respectively. The
Company does not anticipate any material losses as a result of participating in
standby letters of credit or commitments to extend credit.
CONCENTRATIONS OF CREDIT RISK
The Bank originates residential and commercial real estate loans and other
consumer and commercial loans primarily in the north-central Florida area. In
addition, the Bank occasionally purchases loans, primarily in Florida. Although
the Bank has a diversified loan portfolio, a substantial portion of its
borrowers' ability to repay their loans is dependent upon economic conditions in
the Bank's market area.
FEDERAL RESERVE REQUIREMENT
The Federal Reserve Board requires that certain banks maintain reserves,
based on their average deposits, in the form of vault cash and average deposit
balances at a Federal Reserve Bank. The requirement as of December 31, 1997 and
1996 was approximately $2.9 million and $2.4 million, respectively.
LEGAL CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is
F-20
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
not expected to have a material adverse effect on the consolidated financial
condition, operations, or liquidity of the Company.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items include
cash and due from banks, interest-bearing deposits with other banks, federal
funds sold, and securities sold under repurchase agreements. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. The resulting fair values may be
significantly affected by the assumptions used, including the discount rates and
estimates of future cash flows.
The methods and assumptions used to estimate the fair value of the Company's
other financial instruments are as follows:
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices. If
a quoted market price is not available, fair value is estimated using market
prices for similar securities.
LOANS
The loan portfolio is segregated into categories and the fair value of each
loan category is calculated using present value techniques based on projected
cash flows and estimated discount rates. The calculated present values are then
reduced by an allocation of the allowance for loan losses against each
respective loan category.
DEPOSITS
The fair values of noninterest-bearing deposits, NOW accounts, money market
accounts, and savings accounts are the amounts payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities.
NOTES PAYABLE
The carrying value of the Company's notes payable approximates fair value,
as the current rate approximates the market rate.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The estimated fair values for other financial instruments and off-balance
sheet loan commitments are considered to approximate carrying amounts at
December 31, 1997 and 1996.
F-21
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
19. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Company's financial instruments which have estimated fair values
differing from their respective carrying values are presented as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Financial assets:
Investment securities held to maturity..... $ 8,096 $ 7,936 $ 10,009 $ 9,722
Net loans.................................. 158,154 158,343 147,428 147,605
Financial liabilities:
Time deposits.............................. 123,433 123,111 114,511 114,494
</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 items at December 31, 1997, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1997 should not necessarily be considered to apply at subsequent dates.
20. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 7,253,476 $ 344,689
Investment in Bank................................................................. 23,056,750 21,795,997
Other assets....................................................................... 175,493 202,647
------------- -------------
Total assets................................................................... $ 30,485,719 $ 22,343,333
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable.................................................................... $ 1,450,000 $ 2,650,000
Other liabilities................................................................ 10,500 24,500
------------- -------------
Total liabilities.............................................................. 1,460,500 2,674,500
------------- -------------
Shareholders' equity:
Common stock..................................................................... $ 48,568 $ 38,758
Additional paid-in capital....................................................... 19,465,132 12,663,222
Retained earnings................................................................ 9,256,327 6,901,006
Unrealized gain on investment securities available for sale, net of taxes........ 255,192 65,847
------------- -------------
Total shareholders' equity..................................................... 29,025,219 19,668,833
------------- -------------
Total liabilities and shareholders' equity..................................... $ 30,485,719 $ 22,343,333
------------- -------------
------------- -------------
</TABLE>
F-22
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
STATEMENTS OF INCOME
20. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY) (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Dividend income......................................................... $ 1,913,114 $ 1,913,114 $ 1,315,266
Interest income......................................................... 195,081 27,452 12,088
Interest expense........................................................ (169,235) (132,506) (161,467)
------------ ------------ ------------
Net interest and dividend income........................................ 1,938,960 1,808,060 1,165,887
Noninterest expense, net................................................ (40,313) (41,650) (9,974)
------------ ------------ ------------
Income before income taxes and equity in undistributed net income of
subsidiary............................................................ 1,898,647 1,766,410 1,155,913
Income tax benefit...................................................... 5,396 54,721 59,439
------------ ------------ ------------
Income before equity in undistributed net income of subsidiary.......... 1,904,043 1,821,131 1,215,352
Equity in undistributed net income of subsidiary........................ 1,071,408 492,150 625,904
------------ ------------ ------------
Net income.............................................................. $ 2,975,451 $ 2,313,281 $ 1,841,256
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-23
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
STATEMENTS OF CASH FLOWS
20. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY) (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income.......................................................... $ 2,975,451 $ 2,313,281 $ 1,841,256
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed earnings of subsidiary............................ (1,071,408) (492,150) (625,904)
Changes in assets and liabilities:
Other assets................................................ 27,154 (171,542) 29,052
Other liabilities........................................... (14,000) 539 15,765
------------ ------------ ------------
Net cash provided by operating activities....................... 1,917,197 1,650,128 1,260,169
------------ ------------ ------------
Cash flows from investing activities:
Cash paid related to acquisition, net of cash received.............. 0 (2,670,177) 0
------------ ------------ ------------
Cash flows from financing activities:
New borrowings under notes payable.................................. 0 2,650,000 0
Payments on notes payable........................................... (1,200,000) (950,000) (750,000)
Redemption of convertible subordinated debentures................... 0 (274,250) 0
Cash dividends...................................................... (620,130) (378,632) (295,151)
Proceeds from issuance of common stock.............................. 6,811,720 0 0
------------ ------------ ------------
Net cash provided by financing activities....................... 4,991,590 1,047,118 (1,045,151)
------------ ------------ ------------
Net increase in cash and cash equivalents............................... 6,908,787 27,069 215,018
Cash and cash equivalents, beginning of year............................ 344,689 317,620 102,602
------------ ------------ ------------
Cash and cash equivalents, end of year.................................. $ 7,253,476 $ 344,689 $ 317,620
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-24
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
(THOUSANDS)
ASSETS
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:
Noninterest 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>
F-25
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
INTEREST INCOME (IN THOUSANDS)
<S> <C> <C>
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
NONINTEREST INCOME
Service charges..................................................................... 1,304 1,274
Other fees and charges.............................................................. 410 344
Gain on sale of securities.......................................................... 2 1
---------- ----------
Total Noninterest Income........................................................ 1,716 1,619
---------- ----------
NONINTEREST 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 Noninterest 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 (NOTE 3):
Basic earnings per share........................................................ $ 0.43 $ 0.54
---------- ----------
---------- ----------
Average common shares........................................................... 4,856,770 4,152,656
---------- ----------
---------- ----------
Diluted earnings per share...................................................... $ 0 .42 $ 0.53
---------- ----------
---------- ----------
Diluted average common shares and share equivalents............................. 4,969,978 4,211,864
---------- ----------
---------- ----------
</TABLE>
F-26
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
INTEREST INCOME (IN THOUSANDS)
<S> <C> <C>
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
NONINTEREST INCOME
Service charges..................................................................... 451 442
Other fees and charges.............................................................. 128 123
Gain on sale of securities.......................................................... -- 1
---------- ----------
Total Noninterest Income........................................................ 579 566
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits...................................................... 1,250 983
Occupancy and equipment expenses.................................................... 407 362
Other operating expenses............................................................ 724 658
---------- ----------
Total Noninterest 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 (NOTE 3):
Basic earnings per share........................................................ $ 0.13 $ 0.17
---------- ----------
---------- ----------
Average common shares........................................................... 4,856,770 4,697,320
---------- ----------
---------- ----------
Diluted earnings per share...................................................... $ 0.13 $ 0.17
---------- ----------
---------- ----------
Diluted average common shares and share equivalents............................. 4,969,978 4,756,528
---------- ----------
---------- ----------
</TABLE>
F-27
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL GAIN (LOSS)
COMMON PAID-IN RETAINED TREASURY ON INVESTMENT
STOCK CAPITAL EARNINGS STOCK SECURITIES
------------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
(THOUSANDS)
BALANCE, DECEMBER 31, 1997.................... $ 49 $ 19,465 $ 9,256 $ -- $ 255
Net income for the Nine Months Ended September
30, 1998.................................... -- -- 2,067 -- --
Cash Dividends................................ -- -- (729) -- --
Change in Unrealized Gain on Securities
Available for Sale, net of taxes............ -- -- -- -- 192
--- ----------- ----------- ----------- -----
BALANCE, SEPTEMBER 30, 1998................... $ 49 $ 19,465 $ 10,594 $ -- $ 447
--- ----------- ----------- ----------- -----
--- ----------- ----------- ----------- -----
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, DECEMBER 31, 1997.................... $ 29,025
Net income for the Nine Months Ended September
30, 1998.................................... 2,067
Cash Dividends................................ (729)
Change in Unrealized Gain on Securities
Available for Sale, net of taxes............ 192
-------------
BALANCE, SEPTEMBER 30, 1998................... $ 30,555
-------------
-------------
</TABLE>
F-28
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
(IN)THOUSANDS
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 asset 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 (Decrease) 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>
F-29
<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.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR OTHER
INFORMATION TO WHICH THIS DOCUMENT REFERS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Use of Proceeds................................. 13
Dilution........................................ 14
Market for Common Stock......................... 15
Dividends....................................... 15
Capitalization.................................. 16
Selected Consolidated Financial Information and
Other Data.................................... 17
Management's Discussion and Analysis............ 19
Business........................................ 40
Supervision and Regulation...................... 49
Management...................................... 52
Certain Transactions............................ 57
Security Ownership of Certain Beneficial Owners
and Management................................ 58
Description of the Company's Capital Stock...... 59
Underwriting.................................... 60
Incorporation of Certain Information by
Reference..................................... 61
Legal Matters................................... 62
Experts......................................... 62
Index to Consolidated Financial Statements...... F-1
</TABLE>
UNTIL FEBRUARY 23, 1999 ALL DEALERS THAT EFFECT TRANSACTIONS MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,250,000 SHARES
[LOGO]
COMMON STOCK
PROSPECTUS
[LOGO]
[LOGO]
JANUARY 29, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
