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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NO: 0-25988
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CNB, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2958616
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
POST OFFICE BOX 3239 32056
201 NORTH MARION STREET (Zip Code)
LAKE CITY, FLORIDA
(Address of principal executive offices)
Registrant's telephone number, including area code: (904) 755-3240
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
PAR VALUE $ 0.01 PER SHARE.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
("NASDAQ") on February 26, 1999 was $42,063,245.
The number of shares of the Registrant's common stock outstanding as of
March 1, 1999 was 6,106,770 shares, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's 1999 Annual Meeting Proxy Statement is incorporated by
reference in this report in Part III, pursuant to Instruction G of Form 10-K,
except for the information relating to executive officers and key employees. The
Company will file its definitive Proxy Statement with the Commission prior to
April 25, 1999.
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PART I
BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS, WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY DOES NOT
UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH SELECTED
HISTORICAL FINANCIAL INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE COMPANY, WHICH ARE INCLUDED IN THIS FORM 10-K.
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 CNB National Bank (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 Office of the Comptroller
of the Currency ("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 December 31, 1998, the Company had
total assets of $311.6 million, total loans of $187.0 million, total deposits of
$265.1 million, and total shareholders' equity of $30.9 million, reflecting
compound annual growth rates of 15.8%, 23.3%, 14.1% and 27.3%, respectively, for
the five-year period ended December 31, 1998. Net income for the years ended
December 31, 1998, 1997 and 1996 was $2.7 million, $3.0 million and $2.3
million, respectively. For the five-year period ended December 31, 1998, the
compound annual earnings growth rate was 30.5%.
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 Federal Deposit Insurance Corporation (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
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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.
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
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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. Recently, the Company added to its senior management G. Thomas
Frankland and Bennett Brown, 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 and its capital
base, position the Company to work more effectively with middle-market customers
than many smaller community banks in the Expansion Markets.
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
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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.
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
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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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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, healthcare (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 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. The Bank is currently a member
of the HONOR, PLUS and CIRRUS networks of automated teller machines that may be
used by Bank customers in major cities throughout the United States.
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, keeping its charges
competitive with, and generally lower than, those of the regional banks. All
deposits are insured by 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.
LOAN PRODUCTS AND LENDING POLICY
IN GENERAL
The Company provides to 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.
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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.
Agricultural loans are granted to experienced farmers with demonstrated
capabilities, acceptable historical cash flows, reasonable cash flow projections
and adequate secondary sources of repayment.
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.
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.
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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.
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.
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.
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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.
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 (the "Interstate Banking and Branching Act") 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
Jacksonville, 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 Jacksonville, 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.
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EMPLOYEES
As of December 31, 1998, the Bank had 149 full-time equivalent employees.
The Company's operations are conducted through the Bank and, consequently, the
Company does not have any separate employees.
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 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 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.
10
<PAGE>
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 December 31, 1998, were 15.6% and 16.6%, 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 December 31, 1998 was 9.7%. 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 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
11
<PAGE>
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.
12
<PAGE>
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 YEAR ESTABLISHED/
OFFICE LOCATION SQUARE 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>
- ------------------------
(1) Main office.
(2) Houses the operations center including bookkeeping, proof and accounting.
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.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
13
<PAGE>
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
<TABLE>
<S> <C> <C>
K. C. Trowell 60 Mr. Trowell 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 a
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 52 Mr. Frankland 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 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.
Bennett Brown 52 Mr. Brown is the Executive Vice President of the Company and is
the President and Chief Operating Officer of the Bank. Mr. Brown
will join the Company in April 1999. Mr. Brown's background
includes leading the formation of Enterprise National Bank of
Jacksonville as President and Chief Executive Officer in 1987,
which was subsequently acquired by Compass Bancshares in early
1997. He has been City President of Compass Bank since that time.
Prior to forming Enterprise Bank, Mr. Brown was with Florida
National Bank for 10 years. Mr. Brown is a graduate of the
University of South Carolina with a major in Banking and Finance.
He currently is a board member of the Downtown Jacksonville Rotary
Club, and a member of the Board of Trustees for Wolfson Children's
Hospital, Jacksonville, Florida.
Joyce A. Bruner 46 Ms. Bruner 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
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
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 branch
operations. Ms. Bruner has 22 years of banking experience.
Martha S. Williams 48 Ms. Williams 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 is a life-long resident of Live
Oak, Florida and has over 31 years of banking experience. She is a
member of the Altrusa Club and the Chamber of Commerce. In
addition, Ms. Williams volunteers for Hospice of North Florida.
Lloyd D. Adams 51 Mr. Adams 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 54 Mr. Cameron 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 42 Mr. Kennedy 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 twenty-five years of banking experience.
Suzanne M. Norris 34 Ms. Norris 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 to 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, having recently served as the President of the
Lake City/ Columbia County Chamber of Commerce. She serves on the
Board of Trustees for Lake City Community College, the Board of
Directors for the
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
United Way of Suwannee Valley and Epiphany Catholic School and is
a member of Altrusa.
Thomas R. Andrews 53 Mr. Andrews 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 56 Ms. Bullard 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 Board of
Directors of CNB National Bank (the "Bank"). 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 Advisor Council and
the Board of Santa Fe Health Care, Inc.
Raymon Land, Sr. 60 Mr. Land 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 38 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 65 Mr. Pritchett 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 Chief
Executive Officer, and Pritchett, Inc., a timber firm. He is also
in the business of hauling and selling rock materials through his
companies, Bulldog Truck Line, Inc. and GP Materials, Inc., and is
owner of the MH Pritchett Farm in Lake Butler, a cattle operation.
Mr. Pritchett is also Chief Executive Officer of Pritchett
Investment Group which owns Mack Truck dealerships in
Jacksonville, Tampa and Orlando, Florida, as well as Lake City
Mack and Volvo in Lake City and Tampa Volvo in Tampa, Florida.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
William Streicher 63 Mr. Streicher 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, past board member of the Lake City
Medical Center and a past representative to the McDonald's
Advertising Advisory Board of the State of Florida.
</TABLE>
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock. As of March 19, 1999, there were 6,106,770
shares of Common Stock issued and outstanding to 582 holders of record, and
184,500 shares subject to currently exercisable options. As of January 29, 1999,
the Company's common stock began trading on the NASDAQ National Market under the
symbol "CNBB", resulting from the issuance of 1,250,000 shares of common stock
in the Company's initial public offering at $10.25. Proceeds from the offering
net of underwriting discount and expenses approximated $11.4 million. There is
no trading information for any prior years, since there was not an established
market for the Company's common stock.
Shareholders' equity at December 31, 1998 was $30.9 million, as compared to
$29.0 million at December 31, 1997. On July 15, 1998, the Company declared a
two-for-one stock split for shareholders of record on August 10, 1998, effective
August 17, 1998.
Company dividends for 1998 consisted of the payment of quarterly cash
dividends in the amount of $0.05 per common share outstanding on February 5, May
5, August 5 and November 5, 1998. Payment was made to 4,856,770 holders of
record on January 25, April 25, July 25 and October 25, 1998. The $0.20 total
dividend paid in 1998 reflects an increase of 42.9% compared to $0.14 total paid
in 1997 ($0.03 per common share outstanding on February 5 and May 5, and $0.04
on August 5 and November 5, to 3,875,810 holders of record on January 25 and
April 25 and 4,844,770 on July 25 and October 25, 1997, respectively).
The Company's ability to pay dividends on the Common Stock depends
significantly on the ability of the Bank to pay dividends to the Company in
amounts sufficient to service its 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. The Bank
may also issue additional capital stock or incur indebtedness. Futhermore, the
regulations of the Comptroller, regulatory capital levels and the net income of
the Bank determine its ability to pay dividends or make other capital
distributions.
17
<PAGE>
CNB INC. AND SUBSIDIARY
SELECTED YEAR-END FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 CHANGE 1996 1995 1994
--------- --------- ------ --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income............................................. $ 21,119 $ 19,420 9% $ 15,090 $ 12,745 $ 10,303
Interest Expense............................................ (9,417) (8,663) 9% (6,612) (5,966) (4,632)
--------- --------- ------ --------- --------- ---------
Net Interest Income......................................... 11,702 10,757 9% 8,478 6,779 5,671
Provision for Loan Loss..................................... (710) (440) 61% (335) (230) (125)
--------- --------- ------ --------- --------- ---------
Net Interest Income After Provision for Loan Losses......... 10,992 10,317 7% 8,143 6,549 5,546
Non-Interest Income......................................... 2,392 2,153 11% 1,777 1,478 1,330
Non-Interest Expense........................................ (9,298) (7,914) 17% (6,360) (5,172) (4,819)
--------- --------- ------ --------- --------- ---------
Income Before Taxes......................................... 4,086 4,556 (10)% 3,560 2,855 2,057
Income Taxes................................................ (1,407) (1,581) (11)% (1,247) (1,014) (731)
--------- --------- ------ --------- --------- ---------
Net Income.................................................. $ 2,679 $ 2,975 (10)% $ 2,313 $ 1,841 $ 1,326
--------- --------- ------ --------- --------- ---------
--------- --------- ------ --------- --------- ---------
PER COMMON SHARE:(1)
Basic Earnings.............................................. $ 0.55 $ 0.69 (20)% $ 0.67 $ 0.56 $ 0.43
Diluted Earnings............................................ 0.55 0.68 (19)% 0.65 0.55 0.43
Book Value.................................................. 6.36 5.98 6% 5.08 4.50 3.94
Dividends................................................... 0.20 0.14 43% 0.11 0.09 0.04
Actual Shares Outstanding................................... 4,856,770 4,856,770 -- 3,875,810 3,279,466 3,279,466
Weighted Average Shares Outstanding......................... 4,856,770 4,327,534 12% 3,478,248 3,279,466 3,088,114
Diluted Weighted Average Shares Outstanding................. 4,897,922 4,406,616 11% 3,547,390 3,338,674 3,136,744
KEY RATIOS:
Return on Average Assets.................................... 0.93% 1.14% (18)% 1.14% 1.06% 0.81%
Return on Average Shareholders' Equity...................... 8.92% 12.38% (28)% 13.88% 13.24% 11.28%
Dividend Payout............................................. 36.36% 20.29% 79% 16.54% 16.07% 8.70%
Efficiency Ratio............................................ 65.97% 61.30% 8% 62.02% 62.64% 68.83%
Total Risk-Based Capital Ratio.............................. 16.62% 18.67% (11)% 13.58% 14.90% 15.30%
Average Shareholders' Equity to Average Assets.............. 10.43% 9.22% 13% 8.24% 7.99% 7.18%
Tier 1 Capital to Total Assets/Leverage Ratio............... 9.70% 10.20% (5)% 7.25% 7.87% 7.56%
FINANCIAL CONDITION AT YEAR END:
Assets...................................................... $ 311,565 $ 273,331 14% $ 254,945 $ 176,733 $ 168,512
Total Loans, Net............................................ 185,140 158,154 17% 147,428 101,403 85,220
Total Deposits.............................................. 265,109 231,444 15% 226,824 159,003 152,612
Shareholders' Equity........................................ 30,896 29,025 6% 19,669 14,754 12,927
OTHER DATA:(2)
Shareholders of Record...................................... 582 540 8% 529 525 540
Banking Locations........................................... 11 11 -- 10 7 7
Full-Time Equivalent Employees.............................. 149 144 3% 134 95 87
</TABLE>
- ------------------------------
(1) Per share data reflects the two-for-one stock split effective August 17,
1999.
(2) As of March 19, 1999.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following analysis reviews important factors affecting the financial
condition and results of operations of CNB, Inc. for the periods shown. This
section should be read in conjunction with the Consolidated Financial Statements
and related notes. This discussion should facilitate a better understanding of
the major factors and trends which affect the Company's financial condition and
earnings performance, and how the Company's performance during 1998 compares
with prior years. Throughout this section, CNB, Inc. and its subsidiary, CNB
National Bank are referred to as "CNB", "the Company", or "the Bank."
On July 15, 1998, the Company declared a 2-for-1 stock split for
shareholders of record on August 10, 1998, effective August 17, 1998. The
Company's financial statements, charts and other information have been restated
to reflect the 2-for-1 stock split.
Subsequent to the 1998 year end, CNB, Inc. completed its initial public
offering and its common stock began trading on the NASDAQ National Market under
the symbol "CNBB" on January 29, 1999. At December 31, 1998, the Company had
total assets of $311.6 million, loans of $187.0 million and deposits of $265.1
million, reflecting an increase over year-end 1997 amounts of 14.0%, 17.1% and
14.5%, respectively.
Liquidity and capital ratios remain well within regulatory limits. Total
non-performing assets increased by $505,000 to $2.0 million in 1998 from $1.5
million in 1997, an increase of 33.2%. Non-performing assets as a percentage of
total assets increased to 0.65% in 1998 from 0.56% in 1997. The increase in
non-accrual loans since year-end 1997 was attributable to one loan relationship
totaling approximately $414,000 that is in the process of collection. Other real
estate owned increased by $293,000, which is largely due to one commercial real
estate loan. Non-performing assets are further discussed in the section titled
Loan Quality.
Cash dividends increased to $0.20 from $0.14 per share, an increase of 42.9%
compared to 1997. This represented an earnings per share payout of 36.4%.
RESULTS OF OPERATIONS
The Company's earnings for 1998 were $2.7 million or $0.55 per basic share.
This compares to $3.0 million or $0.69 per basic share and $2.3 million or $0.67
per basic share in 1997 and 1996, respectively. Management attributed the
decline in 1998 earnings to increased personnel expense, primarily related to
expansion plans, and to an increased provision for loan losses, reflecting a
decision to maintain the allowance for loan losses at approximately 1.00% of
loans at December 31, 1998, compared to 0.94% at year-end 1997. Per share
earnings for 1998 were also adversely affected by the stock sale in July 1997,
which resulted in an increase in the weighted average shares outstanding from
4,327,534 for 1997 to 4,856,770 for 1998, an increase of 12.2%.
NET INTEREST INCOME/MARGINS
Net interest income is the single largest source of revenue of the Company
and is equal to interest and fee income generated by earning assets less
interest expense.
Net interest income for year-end 1998 increased $945,000 or 8.8%. Total
average assets grew by 10.5%, as the Company's ratio of average earning assets
to total average assets increased slightly to 91.7% from 91.4% in 1997 and 1996.
Average loans grew from $155.2 million in 1997 to $171.0 million in 1998. The
increase in net interest income for 1998 is primarily the result of loan income
growth of $1.3 million, investment income of $364,000, offset by an increase in
interest expense on deposits of $796,000 and a
19
<PAGE>
decrease in borrowings of $42,000. This follows an increase of $2.3 million or
26.9% from 1996 to 1997 in net interest income. The 1997 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. The large increase from 1996 to 1997 is mainly attributable to
internal loan growth, plus the impact from the Riherd Bank Holding Company
acquisition occurring late in the third quarter of 1996.
Net interest margins decreased to 4.43% in 1998, from 4.52% in 1997 and
4.59% in 1996. The average rate on earning assets in 1998 decreased 16 basis
points to 7.99%, while the average rate on interest-bearing liabilities remained
the same at 4.25% for 1998 and 1997. The average rate on earning assets
decreased one basis point to 8.15% in 1997 from 1996, while the average rate on
interest bearing liabilities climbed twelve basis points to 4.25% in 1997 from
1996. With increasing competition and pricing pressures for both assets and
liabilities, margin increases will be both a focus and a challenge for
management in 1999. Table 1: "Average Balances--Yields and Rates", below,
indicates the Company's average volume of interest earning assets and interest
bearing liabilities for 1998, 1997 and 1996. Table 1a: "Analysis of Changes in
Interest Income and Expense" shows the changes in net interest income by
category due to shifts in volumes and rates for years presented.
20
<PAGE>
TABLE 1: AVERAGE BALANCES--YIELDS AND RATES
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- ----------------------------------- ----------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE
--------- ----------- ----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal Funds Sold............ $ 32,583 $ 1,701 5.22% $ 13,480 $ 720 5.34% $ 11,781 $ 613
Investment Securities
Available for Sale.......... 47,675 2,867 6.01 58,442 3,560 6.09 43,180 2,615
Investment Securities Held to
Maturity.................... 6,519 326 5.00 9,160 490 5.35 12,135 654
Loans(1)...................... 171,048 15,877 9.28 155,168 14,542 9.37 117,450 11,188
Interest Bearing Deposits..... 6,494 348 5.36 1,946 108 5.55 352 20
--------- ----------- --- --------- ----------- --- --------- -----------
TOTAL EARNING ASSETS............ 264,319 21,119 7.99 238,196 19,420 8.15 184,898 15,090
All Other Assets.............. 23,774 22,508 17,434
--------- --------- ---------
TOTAL ASSETS.................... $ 288,093 $ 260,704 $ 202,332
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY:
NOW & Money Markets........... $ 68,950 1,682 2.44% $ 62,465 1,555 2.49% $ 50,945 1,330
Savings....................... 16,379 312 1.90 15,146 296 1.95 13,466 277
Time Deposits................. 129,157 7,057 5.46 119,545 6,404 5.36 93,481 4,847
Short Term Borrowings......... 7,233 359 4.96 4,738 239 5.04 520 25
Notes Payable & Debentures.... 85 7 8.00 2,100 169 8.05 1,511 133
--------- ----------- --- --------- ----------- --- --------- -----------
TOTAL INTEREST BEARING
LIABILITIES................... 221,804 9,417 4.25 203,994 8,663 4.25 159,923 6,612
Demand Deposits............... 33,161 30,246 23,701
Other Liabilities............. 3,086 2,434 2,041
Shareholders' Equity.......... 30,042 24,030 16,667
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $ 288,093 $ 260,704 $ 202,332
--------- --------- ---------
--------- --------- ---------
--- ---
INTEREST SPREAD(2).............. 3.74% 3.90%
--- ---
--- ---
----------- ----------- -----------
NET INTEREST INCOME............. $ 11,702 $ 10,757 $ 8,478
----------- ----------- -----------
----------- ----------- -----------
NET INTEREST MARGIN(3).......... 4.43% 4.52%
--- ---
--- ---
<CAPTION>
AVERAGE
RATE
-----------
<S> <C>
ASSETS:
Federal Funds Sold............ 5.20%
Investment Securities
Available for Sale.......... 6.06
Investment Securities Held to
Maturity.................... 5.39
Loans(1)...................... 9.53
Interest Bearing Deposits..... 5.68
---
TOTAL EARNING ASSETS............ 8.16
All Other Assets..............
TOTAL ASSETS....................
LIABILITIES AND SHAREHOLDERS'
EQUITY:
NOW & Money Markets........... 2.61%
Savings....................... 2.06
Time Deposits................. 5.19
Short Term Borrowings......... 4.81
Notes Payable & Debentures.... 8.80
---
TOTAL INTEREST BEARING
LIABILITIES................... 4.13
Demand Deposits...............
Other Liabilities.............
Shareholders' Equity..........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..........
---
INTEREST SPREAD(2).............. 4.03%
---
---
NET INTEREST INCOME.............
NET INTEREST MARGIN(3).......... 4.59%
---
---
</TABLE>
- ------------------------------
(1) Interest income on average loans includes loan fee recognition of $572,000,
$531,000 and $410,000 in 1998, 1997 and 1996 respectively.
(2) Represents the average rate earned minus average rate paid.
(3) Represents net interest income divided by total earning assets.
21
<PAGE>
TABLE 1A: ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
NET CHANGE DECEMBER 31, NET CHANGE DECEMBER 31,
1997-1998 ATTRIBUTABLE TO: 1996-1997 ATTRIBUTABLE TO:
------------------------------------- -------------------------------------
NET NET
VOLUME(1) RATE(2) CHANGE VOLUME(1) RATE(2) CHANGE
----------- ----------- ----------- ----------- ----------- -----------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Federal Funds Sold................................ $ 1,020 $ (39) $ 981 $ 88 $ 19 $ 107
Investment Securities Available for Sale.......... (656) (37) (693) 926 19 945
Investment Securities Held to Maturity............ (141) (23) (164) (160) (4) (164)
Loans............................................. 1,488 (153) 1,335 3,600 (246) 3,354
Interest Bearing Deposits......................... 253 (13) 240 90 (2) 88
----------- ----- ----------- ----------- ----- -----------
Total........................................... 1,964 (265) 1,699 4,544 (214) 4,330
INTEREST EXPENSE:
NOW & Money Markets............................... 161 (34) 127 300 (75) 225
Savings........................................... 24 (8) 16 35 (16) 19
Time Deposits..................................... 515 138 653 1,357 200 1,557
Short Term Borrowings............................. 124 (4) 120 213 1 214
Notes Payable & Debentures........................ (162) -- (162) 52 (16) 36
----------- ----- ----------- ----------- ----- -----------
Total........................................... 662 92 754 1,957 94 2,051
----------- ----- ----------- ----------- ----- -----------
Net Interest Income........................... $ 1,302 $ (357) $ 945 $ 2,587 $ (308) $ 2,279
----------- ----- ----------- ----------- ----- -----------
----------- ----- ----------- ----------- ----- -----------
</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 changes or solely due to rate changes have been
attributed to rate changes.
NON-INTEREST INCOME
Non-interest income increased $239,000 or 11.1% in 1998, compared with
$376,000 or 21.2% in 1997. Components affecting non-interest income are
discussed below.
Service charges on deposit accounts increased $77,000 or 4.4% in 1998,
compared to an increase of 23.4% in 1997. The increase in 1998 was primarily due
to service charges on transaction accounts. The increase in 1997 was
substantially the result of increased assets and deposits associated with the
Riherd Bank Holding Company merger occurring late in the third quarter of 1996.
Other fee income, which includes credit card fees, credit life insurance income,
safe deposit box fees, net gains and losses from sale of securities and other
miscellaneous fees had an increase of $162,000 or 38.7% in 1998 and $47,000 or
12.6% in 1997. The main contributing factors for the increase in 1998 were
credit life insurance fees and mortgage servicing fees collected from the
mortgage loans sold to secondary markets.
Non-interest income as a percent of average assets was 0.83% in 1998 and
1997 compared to 0.88% in 1996.
NON-INTEREST EXPENSE
Non-interest expense increased by $1.4 million, or 17.5%, for the year ended
1998, as compared to $1.6 million, or 24.4% and $1.2 million, or 23.0% in 1997
and 1996, respectively. At the end of 1998, non-interest expenses as a
percentage of average assets increased to 3.2%, as compared to 3.0% and 3.1% for
1997 and 1996, respectively. Salaries and employee benefits have increased
$859,000 from 1997 compared to $843,000 from 1996. The increase from 1997 to
1998 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, a Chief Financial
Officer and several other key positions. The increase from 1996 to 1997 is
primarily attributable to expenses associated with
22
<PAGE>
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. As a percent of average assets, salaries and employee benefits
have increased to 1.67% in 1998 compared to 1.52% in 1997 and 1.54% in 1996.
Occupancy expense increased to $1.6 million in 1998 compared to $1.4 million
in 1997 and $1.0 million in 1996. The increase of $205,000 or 14.8% in occupancy
expense from 1997 to 1998 was largely due to expenses associated with the West
90 Office opening in August 1997, additional depreciation expense on buildings
and equipment and also the purchase of maintenance contracts associated with the
customer statement imaging equipment. The increase of $410,000 or 42.0% in
occupancy expense from 1996 to 1997 is attributable to increased buildings,
furniture and equipment resulting from the Riherd acquisition, which occurred
late in the third quarter of 1996, which added approximately $215,000 to the
occupancy expenses in 1997. Also contributing to the increase was 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 the opening of the West
90 Office in the third quarter of 1997.
Other operating expenses increased $320,000, or 12.5% in 1998. One of the
main contributing factors was an increase in telephone expense, which resulted
from the installation of a new toll free telephone banking system in April 1997
allowing customers access to their accounts 24 hours a day, seven days a week.
Also contributing to the increase was employee educational expense, legal and
professional fees, postage and courier service. In April 1998 the Company began
compensating the Directors for attendance at Board and Committee meetings. These
fees totaled approximately $36,000 for 1998. Since the Company was formed in
1987, this is the first compensation the Directors have received for their
advisory roles. Other operating expenses for 1997 increased $301,000, or 13.3%,
from 1996. The increase is mainly attributable to a 74.2% increase in data
processing costs, or $221,000, resulting when the Company renewed, at prevailing
market rates, a data processing service contract that expired in late 1996.
Furthermore contributing to the increase were operating expenses relating to the
additional offices as well as imaging supplies.
The following table details the areas of significant in other operating
expenses.
TABLE 2: OTHER OPERATING EXPENSES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Data processing.................................................. $ 540 $ 519 $ 298
Postage and delivery............................................. 377 336 219
Telephone........................................................ 271 185 105
Supplies......................................................... 244 231 133
Advertising and promotion........................................ 239 257 237
Legal and professional........................................... 225 158 134
Amortization of intangible assets................................ 190 202 158
Regulatory fees.................................................. 134 119 176
Loan expenses.................................................... 133 135 120
Administrative................................................... 123 103 92
Other............................................................ 411 322 267
--------- --------- ---------
Total other operating expenses................................. $ 2,887 $ 2,567 $ 1,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
23
<PAGE>
INCOME TAXES
The effective tax rate for the year ended December 31, 1998 was 34.4%,
compared to 34.7% for 1997 and 35.0% for 1996. The consolidated provision for
income taxes decreased to $1.4 million in 1998, compared to $1.6 million in 1997
and $1.2 million in 1996. Tax-exempt investment income had a positive impact on
the effective tax rate of 2.9%, 2.3% and 2.4% in 1998, 1997 and 1996,
respectively.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities, at a given time interval, including both
floating rate and instruments which are approaching maturity. The measurement of
the Company's interest rate sensitivity, or gap, is one of the principal
techniques used in asset and liability management. Management generally attempts
to maintain a balance between rate-sensitive assets and liabilities as the
exposure period is lengthened to minimize the overall interest rate risks to the
Company. In the future, the Company will attempt to maintain, with respect to
management's expectations of interest rate changes in the immediate twelve
months, a cumulative gap position within plus, or minus, 20% of total assets.
The asset mix of the balance sheet is continually evaluated 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.
In Table 3, "Rate Sensitivity Analysis", rate sensitive assets and
liabilities are shown by maturity, separated by 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, 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, 1998 should not necessarily be considered to apply at subsequent
dates.
24
<PAGE>
TABLE 3: RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FAIR
1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS BEYOND TOTAL VALUE
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans
Fixed Rate Loans................ $ 8,451 $ 9,127 $ 12,543 $ 11,827 $ 18,556 $ 32,501 $ 93,005 $ 93,645
Average Interest Rate......... 9.13% 10.02% 9.35% 9.08% 8.85% 8.84% 9.08%
Variable Rate Loans............. 9,363 6,589 7,173 4,078 3,576 63,231 94,010 94,010
Average Interest Rate......... 8.76% 9.33% 8.21% 8.79% 8.24% 8.32% 8.44%
Investment Securities(1)
Fixed Rate Investments.......... 38,539 5,489 7,590 3,090 178 2,773 57,659 58,231
Average Interest Rate......... 5.23% 5.60% 6.50% 6.81% 7.10% 5.72% 5.55%
Variable Rate Investments....... -- -- -- -- -- 2,510 2,510 2,525
Average Interest Rate......... 6.04% 6.04%
Federal Funds Sold................ 25,250 -- -- -- -- -- 25,250 25,250
Average Interest Rate......... 4.64% 4.64%
Other Earning Assets(2)........... 12,449 -- -- -- -- -- 12,449 12,449
Average Interest Rate......... 5.49% 5.49%
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INTEREST-EARNING ASSETS..... $ 94,052 $ 21,205 $ 27,306 $ 18,995 $ 22,310 $ 101,015 $ 284,883 $ 286,110
AVERAGE INTEREST RATE......... 5.81% 8.66% 8.26% 8.65% 8.74% 8.36% 7.58%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
NOW............................... $ 14,747 $ -- $ -- $ -- $ -- $ 34,411 $ 49,158 $ 49,158
Average Interest Rate......... 1.25% 1.25% 1.25%
Money Market...................... 24,659 -- -- -- -- 2,307 26,966 26,966
Average Interest Rate......... 3.48% 1.49% 3.31%
Savings........................... 4,911 -- -- -- -- 11,460 16,371 16,371
Average Interest Rate......... 1.59% 1.59% 1.59%
CD's $100,000 and Over............ 31,149 8,095 1,352 948 -- -- 41,544 41,306
Average Interest Rate......... 5.54% 6.31% 6.01% 5.82% 5.71%
CD's Under $100,000............... 77,688 10,288 4,695 2,295 337 66 95,369 94,977
Average Interest Rate......... 5.09% 5.53% 5.67% 5.56% 5.80% 6.04% 5.18%
Securities Sold Under Repurchase
Agreements...................... 12,570 -- -- -- -- -- 12,570 12,570
Average Interest Rate......... 4.39% 4.39%
Notes Payable..................... -- -- -- -- -- -- -- --
Average Interest Rate.........
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INTEREST-BEARING
LIABILITIES..................... $ 165,724 $ 18,383 $ 6,047 $ 3,243 $ 337 $ 48,244 $ 241,978 $ 241,348
AVERAGE INTEREST RATE......... 4.44% 5.87% 5.75% 5.63% 5.80% 1.35% 3.98%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for unrealized gains of $666,000.
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank Stock,
Federal Home Loan Bank Stock and other marketable equity securities.
25
<PAGE>
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 internal Company's analysis, current
average rates within the repricing periods of affected balance sheet categories
are adjusted to a 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. These efforts will continue to provide the tools
necessary in the Company's attempt to maximize its primary earnings factor: net
interest income.
Liquidity is defined as the ability of the Company to meet anticipated
demands for funds under credit commitments and deposit withdrawals at a
reasonable cost 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. These funds can be obtained
by converting assets to cash or by attracting new deposits. Average liquid
assets (cash and amounts due from banks, interest-bearing deposits in other
banks, federal funds sold and securities available-for-sale) totaled $96.9
million and represented 39.1% of average total deposits during 1998, compared to
$83.3 million and 36.6% for 1997.
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.
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, averaged 85.0% of total average deposits in 1998 and 87.3%
in 1997. The Company closely monitors its reliance on time deposits in excess of
$100,000. The Bank does not nor has it ever solicited brokered deposits. Table
4, below, sets forth the amounts of time deposits with balances of $100,000 or
more that mature within indicated periods.
TABLE 4: MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT
-----------
(THOUSANDS)
<S> <C>
Three Months or Less............................................................. $ 12,003
Three Through Six Months......................................................... 8,471
Six Through Twelve Months........................................................ 10,675
Over Twelve Months............................................................... 10,395
-----------
Total............................................................................ $ 41,544
-----------
-----------
</TABLE>
LENDING ACTIVITIES
As of December 31, 1998, the Company had total loans, net of unearned
discount, of $187.0 million as compared to $159.6 million at December 31, 1997,
an increase of $27.4 million, or 17.1%. Commercial, Financial and Agricultural
loans reflected the largest increase of 23.1%. 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 interest-earning assets (assuming that loan
losses are not excessive.) Average loans for the year ended December 31, 1998
were $171.0 million or 64.7% of earning assets as compared to $155.2 million, or
65.1% of earning assets for December 31, 1997. This represented an average loan
to average deposit ratio of 69.1% and 68.2% for 1998 and 1997, respectively.
This growth is reflective of the Company's business plan to increase its loan to
deposit ratio.
26
<PAGE>
The following table compares the composition of the Company's loan portfolio for
the past five years. This loan portfolio composition is expected to stay roughly
the same in 1999.
TABLE 5: LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
TYPES OF LOANS 1998 1997 1996 1995 1994
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ---------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural................ $ 85,208 $ 69,238 $ 68,595 $ 48,948 $ 37,165
Real Estate--Construction............................. 8,527 3,336 4,029 2,159 1,701
Real Estate--Mortgage................................. 72,357 68,561 56,787 34,912 32,914
Installment and Consumer.............................. 20,923 18,514 19,413 16,330 14,267
---------- ---------- ---------- ---------- ---------
Total Loans, Net of Unearned Discount................. 187,015 159,649 148,824 102,349 86,047
Less: Allowance for Loan Losses....................... (1,875) (1,495) (1,396) (946) (827)
---------- ---------- ---------- ---------- ---------
Net Loans............................................. $ 185,140 $ 158,154 $ 147,428 $ 101,403 $ 85,220
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
The following table sets forth the maturity distribution for selected
components of the Company's loan portfolio December 31, 1998. Demand loans and
overdrafts are reported as due in one year or less, and loan maturity is based
upon scheduled principal payments.
TABLE 6: MATURITY SCHEDULE OF SELECTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
0-12 1-5 OVER 5
MONTHS YEARS YEARS TOTAL
--------- --------- --------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, Financial & Agricultural................................. $ 5,341 $ 44,157 $ 35,710 $ 85,208
Real Estate--Construction............................................ 8,527 -- -- 8,527
All Other Loans...................................................... 3,946 29,312 60,022 93,280
--------- --------- --------- ----------
Total................................................................ $ 17,814 $ 73,469 $ 95,732 $ 187,015
--------- --------- --------- ----------
--------- --------- --------- ----------
Fixed Interest Rate.................................................. $ 8,451 $ 52,053 $ 32,501 $ 93,005
Variable Interest Rate............................................... $ 9,363 $ 21,416 $ 63,231 $ 94,010
</TABLE>
LOAN QUALITY
Total non-performing assets increased by $505,000, or 33.2% to 2.0 million
in 1998, from $1.5 million in 1997. Despite the increase, the Company's ratio of
non-performing assets to total loans plus other real state owned, is consistent
with other peer banking institutions. Non-performing assets as a percentage of
total assets increased to 0.65% in 1998 from 0.56% in 1997. Non-accrual loans
have increased $348,000 since December 31, 1997. The increase in non-accrual
loans is mainly attributable to one loan relationship totaling approximately
$414,000 that is in the process of collection. Other real estate owned increased
by $293,000, which is largely due to one commercial real estate loan.
27
<PAGE>
TABLE 7: NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans...................................................... $ 1,393 $ 1,045 $ 87 $ 372 $ 645
Past Due Loans 90 Days or More and Still Accruing...................... 22 158 229 159 210
Other Real Estate Owned & Repossessions................................ 613 320 88 126 62
--------- --------- --------- --------- ---------
Total Non-Performing Assets.......................................... $ 2,028 $ 1,523 $ 404 $ 657 $ 917
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Percent of Total Assets................................................ 0.65% 0.56% 0.16% 0.37% 0.54%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. On an ongoing basis, management attempts to maintain the
allowance for loan losses at levels sufficient to provide for losses inherent to
the loan portfolio. The allowance for loan losses is established through a
provision charged to expense. Loans are charged against the allowance when it is
recognized that collection of the principal is unlikely. The allowance for loan
losses on December 31, 1998, was 1.00% of total loans. Table 8: "Allocation of
Allowance for Loan Losses," set forth below, indicates the specific reserves
allocated by loan type.
TABLE 8: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------------- -------------------------- -------------------------- -----------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
----------- ------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial and
Agricultural............ $ 1,061 45.6% $ 932 43.4% $ 821 46.1% $ 476
Real
Estate--Construction.... 6 4.5% 9 2.1% 5 2.7% 5
Real Estate--Mortgage..... 127 38.7% 163 42.9% 154 38.2% 72
Consumer.................. 621 11.2% 391 11.6% 416 13.0% 389
Unallocated............... 60 -- -- -- -- -- 4
----------- --- ----------- --- ----------- --- -----
Total................... $ 1,875 100% $ 1,495 100% $ 1,396 100% $ 946
----------- --- ----------- --- ----------- --- -----
----------- --- ----------- --- ----------- --- -----
<CAPTION>
1994
--------------------------
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
TOTAL LOANS AMOUNT TOTAL LOANS
------------- ----------- -------------
<S> <C> <C> <C>
Commercial, Financial and
Agricultural............ 47.8% $ 454 43.2%
Real
Estate--Construction.... 2.1% 3 2.0%
Real Estate--Mortgage..... 34.1% 56 38.2%
Consumer.................. 16.0% 275 16.6%
Unallocated............... -- 39 --
--- ----- ---
Total................... 100% $ 827 100%
--- ----- ---
--- ----- ---
</TABLE>
The determination of the reserve level rests upon management's judgment
about factors affecting loan quality and assumptions about the economy.
Management considers the period-end allowance appropriate and adequate to cover
losses inherent in the loan portfolio; however, management's judgment is based
upon a number of assumptions about future events, which are believed to be
reasonable, but which may or may not prove to be valid. Thus, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
loan losses or that additional increases in the allowance for loan losses will
not be required. Table 9: "Activity in Allowance for Loan Losses", below,
indicates activity in the allowance for loan losses for the years 1998, 1997,
1996, 1995 and 1994.
28
<PAGE>
TABLE 9: ACTIVITY IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year......................... $ 1,495 $ 1,396 $ 946 $ 827 $ 690
Allowance Acquired by Merger......................... -- -- 370 -- 169
Loans Charged-Off:
Commercial, Financial and Agricultural............. 123 160 79 11 38
Real Estate, Mortgage.............................. 3 -- 1 -- 22
Consumer........................................... 296 248 203 159 122
---------- ---------- ---------- ---------- ----------
Total Loans Charged-Off.......................... (422) (408) (283) (170) (182)
Recoveries on Loans Previously Charged-Off:
Commercial, Financial and Agricultural............. 41 24 7 17 4
Real Estate Mortgage............................... 7 -- 1 -- 11
Consumer........................................... 44 43 20 42 10
---------- ---------- ---------- ---------- ----------
Total Loan Recoveries............................ 92 67 28 59 25
---------- ---------- ---------- ---------- ----------
Net Loans Charged-Off.......................... (330) (341) (255) (111) (157)
---------- ---------- ---------- ---------- ----------
Provision for Loan Losses
Charged to Expense................................. 710 440 335 230 125
---------- ---------- ---------- ---------- ----------
Ending Balance....................................... $ 1,875 $ 1,495 $ 1,396 $ 946 $ 827
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Loans Outstanding.............................. $ 187,015 $ 159,649 $ 148,824 $ 102,349 $ 86,047
Average Loans Outstanding............................ $ 171,048 $ 155,168 $ 117,450 $ 93,454 $ 78,817
Allowance for Loan Losses to Loans Outstanding....... 1.00% 0.94% 0.94% 0.92% 0.96%
Net Charge-Offs to Average Loans Outstanding......... 0.19% 0.22% 0.22% 0.12% 0.20%
</TABLE>
INVESTMENT PORTFOLIO
The Company uses its securities portfolio to assist in maintaining proper
interest rate sensitivity in the balance sheet, to provide securities to pledge
as collateral for public funds and repurchase agreements, and to provide an
alternative investment for available funds. The book value of securities was
$62.3 million for 1998, an increase of 2.2% from $60.9 million in 1997.
When the Company's liquidity position exceeds expected loan demand, other
investments are considered by management as a secondary earnings alternative.
Management generally 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 will mature 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 an unrealized gain, net of taxes, of approximately $418,000 on December 31,
1998, as compared to $255,000 on December 31, 1997. Unrealized gains or losses
are recorded as adjustments to shareholders' equity but are not included in the
Company's statement of income.
29
<PAGE>
The following tables set forth the maturity distribution and the weighted
average yields of securities held to maturity and securities available for sale.
TABLE 10: MATURITY DISTRIBUTION OF INVESTMENT SECURITIES(1)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury:
One Year or Less........................................... $ -- $ -- $ 8,002 $ 8,068
Over One Through Five Years................................ -- -- 9,964 10,358
----------- ------ ----------- ------------
Total U.S. Treasury.......................................... -- -- 17,966 18,426
U.S. Government Agencies and Corporations:
One Year or Less........................................... -- -- 30,525 30,536
Over One Through Five Years................................ -- -- 3,000 3,012
Over Five Through Ten Years................................ -- -- -- --
----------- ------ ----------- ------------
Total U.S. Government Agencies and Corporations.............. -- -- 33,525 33,548
Obligations of State and Political Subdivisions:
Over One Through Five Years................................ -- -- 873 899
Over Five Through Ten Years................................ -- -- 100 104
Over Ten Years............................................. -- -- 608 658
----------- ------ ----------- ------------
Total Obligations of State and Political Subdivisions........ -- -- 1,581 1,661
Mortgage-Backed Securities(2):
One Year or Less........................................... -- -- 13 13
Over One Through Five Years................................ 2,940 2,944 -- --
Over Five Through Ten Years................................ -- -- 1,610 1,617
Over Ten Years............................................. -- -- 2,534 2,547
----------- ------ ----------- ------------
Total Mortgage-Backed Securities............................. 2,940 2,944 4,157 4,177
Other Securities:
Over Ten Years(3).......................................... -- -- 1,443 1,525
----------- ------ ----------- ------------
Total Other Securities....................................... -- -- 1,443 1,525
----------- ------ ----------- ------------
Total Securities............................................. $ 2,940 $ 2,944 $ 58,672 $ 59,337
----------- ------ ----------- ------------
----------- ------ ----------- ------------
</TABLE>
- ------------------------
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Represents investments in mortgage-backed securities which are subject to
early repayment.
(3) Represents investment in Federal Reserve Bank and Federal Home Loan Bank
stock and other marketable equity securities.
30
<PAGE>
TABLE 10A: WEIGHTED AVERAGE YIELD BY RANGE OF MATURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
One Year or Less.................................................................................. 5.23% 5.63%
Over One through Five Years....................................................................... 6.26 5.93
Over Five through Ten Years....................................................................... 5.82 6.78
Over Ten Years(1)................................................................................. 5.91 6.53
</TABLE>
- ------------------------
(1) Represents adjustable rate, mortgage-backed securities which are repriceable
within one year.
CAPITAL RESOURCES
The Comptroller regulates risk based capital guidelines for national banks.
These guidelines are intended to provide an additional measure of a bank's
capital adequacy by assigning weighted levels of risk to asset categories. Banks
are also required to systematically hold capital against such "off balance
sheet" activities as loans sold with recourse, loan commitments, guarantees and
standby letters of credit. These guidelines are intended to strengthen the
quality of capital by increasing the emphasis on common equity and restricting
the amount of loss reserves and other forms of equity such as preferred stock
that may be included in capital.
Under the terms of the guidelines, banks must meet minimum capital adequacy
based upon both total assets and risk adjusted assets. All banks are required to
maintain a minimum ratio of total capital to risk-weighted assets of 8% and a
minimum ratio of Tier 1 capital to risk-weighted assets of 4%. Tier 1 Capital
includes common shareholders' equity and qualifying preferred stock, less
goodwill and other adjustments. Tier 2 Capital consists of preferred stock not
qualifying as Tier 1 Capital, mandatory convertible debt, limited amounts of
subordinated debt, other qualifying term debt and the allowance for credit
losses up to 1.25% of risk-weighted assets. Total Capital consists of Tier 1
Capital and Tier 2 Capital. The regulatory agencies have also established an
additional capital adequacy guideline referred to as the Tier 1 leverage ratio
that measures the ratio of Tier 1 capital to average quarterly assets. Adherence
to these guidelines has not had an adverse impact on the Company or the Bank.
Selected capital ratios at year-end 1998 as compared to 1997 are as follows:
TABLE 11: CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31, WELL
-------------------- CAPITALIZED REGULATORY
1998 1997 REQUIREMENTS MINIMUMS
--------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Risk Based Capital Ratios:
Tier 1 Capital Ratio........................................... 15.6% 17.7% 6.0% 4.0%
Total Capital to Risk-Weighted Assets............................ 16.6% 18.7% 10.0% 8.0%
Tier 1 Leverage Ratio............................................ 9.7% 10.2% 5.0% 4.0%
</TABLE>
YEAR 2000 COMPLIANCE
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.
31
<PAGE>
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 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 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
Company has contingency plans in place for mission critical systems in the event
of unforeseen difficulties to minimize any disruptions.
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 has participated during 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 associated with the Company's Year 2000 issues are not expected to
have a material impact on the results of the operations or financial condition
of the Company.
There can be no assurance that all necessary modifications will be
identified and corrected or that all 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 present 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.
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
32
<PAGE>
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
Table 12 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. The results
for any quarter are not necessarily indicative of results for any future period.
TABLE 12: SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income................ $ 3,028 $ 2,943 $ 2,941 $ 2,790 $ 2,773 $ 2,757 $ 2,586 $ 2,641
Provision for loan losses.......... 310 170 150 80 110 70 130 130
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses.................. 2,718 2,773 2,791 2,710 2,663 2,687 2,456 2,511
Other income (excluding securities
transactions).................... 674 579 565 570 534 565 498 555
Securities gains (losses), net..... 2 -- -- 2 -- 1 -- --
Other expenses..................... 2,463 2,381 2,292 2,162 2,066 2,003 1,918 1,927
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax expense... 931 971 1,064 1,120 1,131 1,250 1,036 1,139
Income tax expense................. 319 333 367 388 391 436 356 398
--------- --------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 612 $ 638 $ 697 $ 732 $ 740 $ 814 $ 680 $ 741
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Basic earnings per common share.... $0.13 $0.13 $0.15 $0.15 $0.16 $0.17 $0.17 $0.19
Diluted earnings per common
share............................ 0.13 0.13 0.14 0.15 0.15 0.17 0.17 0.19
</TABLE>
33
<PAGE>
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange 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.
Financial instruments that have market risk are included in Table 3: "Rate
Sensitivity Analysis". These instruments are shown by maturity, separated by
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 judgement of the most appropriate factors, there is no
assurance that, were the Company to have disposed of such instruments at
December 31, 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, 1998 should not
necessarily be considered to apply at subsequent dates.
FINANCIAL STATEMENTS
The consolidated financial statements which follow have been audited by the
Company's independent certified public accountants, Arthur Andersen LLP. Their
opinion on the Company's consolidated financial statements is also included
therein.
34
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH
AUDITORS' REPORT
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
CNB, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial
condition of CNB, INC. (a Florida corporation) AND SUBSIDIARY as of December 31,
1998 and 1997 and the related consolidated statements of income, shareholders'
equity, and cash flows for the years 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 were audited by other auditors whose
report dated January 31, 1997 expressed an unqualified opinion on those
statements.
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 financial statements referred to above present fairly,
in all material respects, the financial position of CNB, Inc. and Subsidiary as
of December 31, 1998 and 1997 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
February 3, 1999
36
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders
CNB, Inc.
Lake City, Florida
We have audited the accompanying consolidated statement of financial
condition of CNB, Inc. and Subsidiary as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year 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 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 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 the results of their operations and
their cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
OSBURN, HENNING AND COMPANY
January 31, 1997
Orlando, Florida
37
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks............................................................... $ 12,630 $ 9,996
Federal funds sold.................................................................... 25,250 24,125
Interest-bearing deposits in other banks.............................................. 11,007 5,736
---------- ----------
Total cash and cash equivalents................................................... 48,887 39,857
INVESTMENT SECURITIES AVAILABLE FOR SALE................................................ 59,337 52,843
INVESTMENT SECURITIES HELD TO MATURITY.................................................. 2,940 8,096
LOANS, net.............................................................................. 185,140 158,154
PREMISES AND EQUIPMENT, net............................................................. 10,754 10,117
OTHER ASSETS............................................................................ 4,507 4,264
---------- ----------
Total assets...................................................................... $ 311,565 $ 273,331
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand......................................................... $ 35,701 $ 29,703
Savings, NOW, and money market...................................................... 92,495 78,308
Time, under $100,000................................................................ 95,369 90,277
Time, $100,000 and over............................................................. 41,544 33,156
---------- ----------
Total deposits.................................................................... 265,109 231,444
Securities sold under repurchase agreements........................................... 12,570 9,157
Notes payable......................................................................... -- 1,450
Other liabilities..................................................................... 2,990 2,255
---------- ----------
Total liabilities................................................................. 280,669 244,306
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 19 and 20)
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 for 1998 and 1997................................................... 49 49
Additional paid-in capital............................................................ 19,465 19,465
Retained earnings..................................................................... 10,964 9,256
Accumulated other comprehensive income, net of taxes.................................. 418 255
---------- ----------
Total shareholders' equity........................................................ 30,896 29,025
---------- ----------
Total liabilities and shareholders' equity........................................ $ 311,565 $ 273,331
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
37
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(DOLLARS AND SHARES IN
THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans.................................................. $ 15,877 $ 14,542 $ 11,188
Interest on investment securities available for sale........................ 2,869 3,560 2,615
Interest on investment securities held to maturity.......................... 326 490 654
Interest on federal funds sold.............................................. 1,701 720 613
Interest on interest-bearing deposits....................................... 346 108 20
--------- --------- ---------
Total interest income................................................... 21,119 19,420 15,090
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits........................................................ 9,051 8,255 6,454
Interest on short-term borrowings........................................... 359 239 25
Interest on notes payable................................................... 7 169 133
--------- --------- ---------
Total interest expense.................................................. 9,417 8,663 6,612
--------- --------- ---------
NET INTEREST INCOME........................................................... 11,702 10,757 8,478
PROVISION FOR LOAN LOSS....................................................... 710 440 335
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS............................. 10,992 10,317 8,143
--------- --------- ---------
NON-INTEREST INCOME:
Service charges............................................................. 1,811 1,734 1,405
Other fees and charges...................................................... 577 418 397
Gain (loss) on sale of securities........................................... 4 1 (25)
--------- --------- ---------
Total non-interest income............................................... 2,392 2,153 1,777
--------- --------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits.............................................. 4,819 3,960 3,117
Occupancy and equipment expenses............................................ 1,592 1,387 977
SAIF assessment............................................................. -- -- 327
Other operating expenses.................................................... 2,887 2,567 1,939
--------- --------- ---------
Total non-interest expense.............................................. 9,298 7,914 6,360
--------- --------- ---------
INCOME BEFORE INCOME TAXES.................................................... 4,086 4,556 3,560
INCOME TAXES.................................................................. 1,407 1,581 1,247
--------- --------- ---------
NET INCOME.................................................................... $ 2,679 $ 2,975 $ 2,313
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE:
Basic earnings per share.................................................... $ 0.55 $ 0.69 $ 0.67
--------- --------- ---------
--------- --------- ---------
Average common shares....................................................... 4,857 4,328 3,478
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share.................................................. $ 0.55 $ 0.68 $ 0.65
--------- --------- ---------
--------- --------- ---------
Diluted average common shares and share equivalents......................... 4,898 4,407 3,547
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
38
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
---------------------- PAID-IN RETAINED INCOME (LOSS), SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS NET OF TAXES EQUITY
----------- --------- ----------- --------- ----------------- -------------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995................. 3,279 $ 33 $ 9,768 $ 4,966 $ (13) $ 14,754
Comprehensive income:
Net income............................... 2,313
Change in unrealized gain on investment
securities available for sale, net of
taxes.................................. 79
Total comprehensive income............... 2,392
Cash dividends............................. (378) (378)
Shares issued in connection with an
acquisition.............................. 596 6 2,895 2,901
----- --------- ----------- --------- ----- -------------
BALANCE, December 31, 1996................. 3,875 39 12,663 6,901 66 19,669
Comprehensive income:
Net income............................... 2,975
Change in unrealized gain on investment
securities available for sale, net of
taxes.................................. 189
Total comprehensive income............... 3,164
Cash dividends............................. (620) (620)
Issuance of common stock, net of offering
cost..................................... 969 10 6,744 6,754
Issuance of common stock for option
agreements, net of repurchases........... 12 58 58
----- --------- ----------- --------- ----- -------------
BALANCE, December 31, 1997................. 4,856 49 19,465 9,256 255 29,025
Comprehensive income:
Net income............................... 2,679
Change in unrealized gain on investment
securities available for sale, net of
taxes.................................. 163
Total comprehensive income............... 2,842
Cash dividends............................. (971) (971)
----- --------- ----------- --------- ----- -------------
BALANCE, December 31, 1998................. 4,856 $ 49 $ 19,465 $ 10,964 $ 418 $ 30,896
----- --------- ----------- --------- ----- -------------
----- --------- ----------- --------- ----- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
39
<PAGE>
CNB, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 2,679 $ 2,975 $ 2,313
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 894 828 580
Provision for loan losses.............................................. 710 440 335
Investment securities amortization, net................................ 54 135 226
Deferred income tax benefit............................................ (14) (30) (166)
Changes in assets and liabilities:
Other assets......................................................... (515) (246) 171
Other liabilities.................................................... 735 219 337
---------- ---------- ----------
Net cash provided by operating activities.......................... 4,543 4,321 3,796
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale.................... (28,908) (17,192) (17,630)
Proceeds from sales of investment securities available for sale.......... -- -- 4,014
Proceeds from maturities of investment securities available for sale..... 22,654 25,417 10,267
Proceeds from maturities of investment securities held to maturity....... 5,121 1,877 3,185
Net increase in loans.................................................... (27,696) (11,165) (21,773)
Purchases of premises and equipment...................................... (1,341) (1,284) (1,427)
Cash received related to acquisition, net of cash paid................... -- -- 214
---------- ---------- ----------
Net cash used in investing activities.............................. (30,170) (2,347) (23,150)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits................................................. 33,665 4,620 24,449
Net increase in securities sold under repurchase agreements.............. 3,413 5,390 3,766
Borrowings under note payable............................................ -- -- 2,650
Repayment of note payable................................................ (1,450) (1,200) (950)
Redemption of subordinated debentures.................................... -- -- (274)
Cash dividends........................................................... (971) (620) (378)
Issuance of common stock in connection with rights offering.............. -- 6,754 --
Issuance of common stock for option agreements........................... -- 58 --
---------- ---------- ----------
Net cash provided by financing activities.......................... 34,657 15,002 29,263
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................. 9,030 16,976 9,909
CASH AND CASH EQUIVALENTS, beginning of year............................... 39,857 22,881 12,972
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year..................................... $ 48,887 $ 39,857 $ 22,881
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
40
<PAGE>
CNB, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation. Also
the financial statements, as well as share and per share data, and other
information have been reclassified 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 management purposes which
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 in the accumulated other comprehensive income 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.
41
<PAGE>
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 1998, 1997 and 1996,
loan fees included in interest and fees on loans amounted to approximately
$572,000, $531,000 and $410,000, 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 approximately
$1,366,000 and $1,557,000 at December 31, 1998 and 1997, 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 approximately
$190,000, $202,000 and $158,000 for 1998, 1997 and 1996, respectively.
42
<PAGE>
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
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 and common
stock equivalents outstanding. 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, 1998, 1997 and 1996.
SUPPLEMENTAL 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 cash equivalents have an original maturity of 90 days or
less. Cash paid for interest was approximately $9,049,000, $8,308,000 and
$6,633,000 during 1998, 1997 and 1996, respectively, and cash paid for
income taxes was approximately $1,384,000, $1,785,000 and $1,248,000 during
1998, 1997 and 1996, 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.
43
<PAGE>
4. INVESTMENT SECURITIES
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 1998 are as follows (in thousands):
<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........................ $ 17,966 $ 33,525 $ 1,581 $ 4,157 $ 1,443 $ 58,672
Gross unrealized:
Gains............................... 460 23 80 25 82 670
Losses.............................. -- -- -- (5) -- (5)
----------- ----------- ----------- ----------- --------- ---------
Estimated fair value.................. $ 18,426 $ 33,548 $ 1,661 $ 4,177 $ 1,525 $ 59,337
----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- --------- ---------
</TABLE>
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 1997 are as follows (in thousands):
<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 $ 14,668 $ 1,415 $ 8,018 $ 1,388 $ 52,436
Gross unrealized:
Gains............................... 273 34 72 89 -- 468
Losses.............................. (1) (18) -- (42) -- (61)
----------- ----------- ----------- ----------- --------- ---------
Estimated fair value.................. $ 27,219 $ 14,684 $ 1,487 $ 8,065 $ 1,388 $ 52,843
----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- --------- ---------
</TABLE>
Amortized cost and estimated fair value of investment securities held to
maturity, consisting of mortgage backed securities, are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Amortized cost........................................................ $ 2,940 $ 8,096
Gross unrealized:
Gains............................................................... 4 6
Losses.............................................................. -- (166)
--------- ---------
Estimated fair value.................................................. $ 2,944 $ 7,936
--------- ---------
--------- ---------
</TABLE>
During 1998 and 1997, no investment securities available for sale were sold.
During 1996, investment securities available for sale with a carrying amount
of approximately $4,039,000 were sold for approximately $4,014,000,
resulting in a loss of approximately $25,000.
Interest income earned on tax-exempt securities in 1998, 1997 and 1996 was
approximately $83,000, $91,000 and $32,000, respectively. Dividends of
approximately $93,000, $84,000 and $65,000 on stock of the Federal Reserve
Bank and the Federal Home Loan Bank are included in interest on investment
securities available for sale in 1998, 1997 and 1996, respectively.
44
<PAGE>
4. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities at December 31,
1998, by contractual maturity, are shown below (in thousands):
<TABLE>
<CAPTION>
INVESTMENT SECURITIES INVESTMENT SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in:
One year or less............................................ $ 38,527 $ 38,604 $ -- $ --
After one through five years................................ 13,837 14,269 -- --
After five through ten...................................... 100 104 -- --
Over ten years.............................................. 608 658 -- --
Mortgage-backed securities and others....................... 5,600 5,702 2,940 2,944
----------- ----------- ----------- -----------
$ 58,672 $ 59,337 $ 2,940 $ 2,944
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
At December 31, 1998, U.S. Treasury and Government agency securities with an
amortized cost of approximately $24,288,000 and an estimated fair value of
approximately $24,847,000 were pledged to secure public funds, treasury tax
and loan deposits, and repurchase agreements.
5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND NONPERFORMING ASSETS
Loans at December 31, 1998 and 1997 were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commercial, financial, and agricultural.......................... $ 85,208 $ 69,238
Real estate--construction........................................ 8,527 3,336
Real estate--mortgage............................................ 72,357 68,561
Installment and consumer lines................................... 20,923 18,514
---------- ----------
Total loans, net of unearned discount.......................... 187,015 159,649
Less allowance for loan losses................................... (1,875) (1,495)
---------- ----------
Net loans...................................................... $ 185,140 $ 158,154
---------- ----------
---------- ----------
</TABLE>
Activity in the allowance for loan losses account was as follows for the
years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance beginning of year................................... $ 1,495 $ 1,396 $ 946
Acquired in acquisition................................... -- -- 370
Provision................................................. 710 440 335
Charge-offs............................................... (422) (408) (283)
Recoveries................................................ 92 67 28
--------- --------- ---------
Balance at end of year...................................... $ 1,875 $ 1,495 $ 1,396
--------- --------- ---------
--------- --------- ---------
</TABLE>
Nonaccrual loans totaled approximately $1,393,000 and $1,045,000 at December
31, 1998 and 1997, 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
45
<PAGE>
5. LOANS, ALLOWANCE FOR LOAN LOSSES, AND NONPERFORMING ASSETS (CONTINUED)
charged off, was approximately $56,000, $51,000 and $25,000, in 1998, 1997
and 1996, 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 approximately $600,000 and
$320,000 at December 31, 1998 and 1997, 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, 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Impaired loans with an allowance...................................... $ 1,744 $ 811
Impaired loans without an allowance(1)................................ -- 583
--------- ---------
Total impaired loans................................................ $ 1,744 $ 1,395
--------- ---------
--------- ---------
Allowance for impaired loans.......................................... $ 408 $ 267
--------- ---------
--------- ---------
Interest income recognized on impaired loans during the year.......... $ 93 $ 73
--------- ---------
--------- ---------
</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.
The average balance of impaired loans during 1998, 1997 and 1996
approximated $1 million.
6. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following components at
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Buildings and improvements......................................... $ 8,629 $ 8,251
Equipment and furnishings.......................................... 4,213 3,937
Land............................................................... 2,604 1,927
--------- ---------
15,446 14,115
Less accumulated depreciation...................................... (4,692) (3,998)
--------- ---------
$ 10,754 $ 10,117
--------- ---------
--------- ---------
</TABLE>
Depreciation was approximately $704,000, $626,000 and $421,000 for 1998,
1997 and 1996, respectively.
46
<PAGE>
7. DEPOSITS
At December 31, 1998, the scheduled maturities of time certificates of
deposit are as follows (in thousands):
<TABLE>
<S> <C>
1999.......................................................... $ 108,837
2000.......................................................... 18,383
2001.......................................................... 6,047
2002.......................................................... 3,243
2003 and thereafter........................................... 403
---------
$ 136,913
---------
---------
</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 1998, 1997, and 1996 was approximately $7,233,000,
$4,738,000 and $520,000, respectively. Interest expense in 1998, 1997 and
1996 was approximately $359,000, $238,000 and $25,000, respectively,
resulting in an average rate paid of 4.97% in 1998, 5.03% in 1997 and 4.81%
in 1996. The highest amount outstanding during 1998, 1997 and 1996 was
approximately $12,570,000, $9,157,000 and $5,035,000, respectively.
9. NOTES PAYABLE
The Company is indebted under the following notes payable at December 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<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
--------- ---------
--------- ---------
</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. There were no amounts outstanding as of
December 31, 1998.
47
<PAGE>
10. OTHER OPERATING EXPENSES
Components of other operating expenses are as follows for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Data processing............................................. $ 540 $ 519 $ 298
Postage and delivery........................................ 377 336 219
Advertising and promotion................................... 239 257 237
Supplies.................................................... 244 231 133
Amortization of intangible assets........................... 190 202 158
Telephone................................................... 271 185 105
Legal and professional...................................... 225 158 134
Loan expense................................................ 133 135 120
Regulatory fees............................................. 134 119 176
Administrative.............................................. 123 103 92
Other....................................................... 411 322 267
--------- --------- ---------
$ 2,887 $ 2,567 $ 1,939
--------- --------- ---------
--------- --------- ---------
</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
approximately $327,000 for the Company.
11. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1998,
1997 and 1996 consisted of the following components (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................................... $ 1,365 $ 1,438 $ 1,229
State..................................................... 56 173 184
--------- --------- ---------
Total................................................... $ 1,421 $ 1,611 $ 1,413
--------- --------- ---------
--------- --------- ---------
Deferred:
Federal................................................... $ (147) $ (69) $ (149)
State..................................................... 133 39 (17)
--------- --------- ---------
Total................................................... $ (14) $ (30) $ (166)
--------- --------- ---------
--------- --------- ---------
Total:
Federal................................................... $ 1,218 $ 1,369 $ 1,080
State..................................................... 189 212 167
--------- --------- ---------
Total................................................... $ 1,407 $ 1,581 $ 1,247
--------- --------- ---------
--------- --------- ---------
</TABLE>
48
<PAGE>
11. INCOME TAXES (CONTINUED)
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, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment................................................. $ 685 $ 513
Unearned loan fees..................................................... 37 28
Unrealized gain on investment securities available for sale............ 248 152
--------- ---------
970 693
--------- ---------
Deferred tax assets:
Loan loss provisions................................................... 607 432
Intangible assets...................................................... 94 80
Other items............................................................ 50 44
--------- ---------
751 556
--------- ---------
Net deferred tax liability............................................... $ 219 $ 137
--------- ---------
--------- ---------
</TABLE>
The reasons for the differences between the statutory federal income tax
rate and the effective tax rate are summarized as follows for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory rates.............................................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income................................ (2.9) (2.3) (2.4)
State income taxes, net.................................... 2.6 2.5 3.1
Nondeductible expenses..................................... 0.7 0.5 0.3
--- --- ---
34.4% 34.7% 35.0%
--- --- ---
--- --- ---
</TABLE>
12. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that certain transactions
and other economic events that bypass the income statement must be displayed
as other comprehensive income. The Company's comprehensive income consists
of net income and changes in unrealized gains (losses) on securities
available-for-sale, net of income taxes.
49
<PAGE>
12. COMPREHENSIVE INCOME (CONTINUED)
Comprehensive income for 1998, 1997 and 1996 is calculated as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Unrealized gains (net) recognized in other comprehensive
income:
Before tax................................................ $ 258 $ 301 $ 126
Income tax................................................ 95 112 47
--------- --------- ---------
Net of tax................................................ $ 163 $ 189 $ 79
--------- --------- ---------
--------- --------- ---------
Amounts reported in net income:
Gain (loss) on sale of securities......................... $ 4 $ 1 $ (25)
Net amortization.......................................... 54 135 226
--------- --------- ---------
Reclassification adjustment............................... 58 136 201
Income tax expense........................................ (20) (47) (70)
--------- --------- ---------
Reclassification adjustment, net of tax................... $ 38 $ 89 $ 131
--------- --------- ---------
--------- --------- ---------
Amounts reported in other comprehensive income:
Unrealized gain (loss) arising during period, net of
tax..................................................... $ 201 $ 278 $ 210
Reclassification adjustment, net of tax................... (38) (89) (131)
--------- --------- ---------
Unrealized gains (net) recognized in other comprehensive
income.................................................. 163 189 79
Net income................................................ 2,679 2,975 2,313
--------- --------- ---------
Total comprehensive income.............................. $ 2,842 $ 3,164 $ 2,392
--------- --------- ---------
--------- --------- ---------
</TABLE>
13. 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 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Balance, January 1.................................................. $ 4,450 $ 2,033
New loans and advances............................................ 3,127 4,425
Repayments (excluding renewals)................................... (4,271) (2,008)
--------- ---------
Balance, December 31................................................ $ 3,306 $ 4,450
--------- ---------
--------- ---------
</TABLE>
The loans analyzed above were made in the normal course of business at
prevailing interest rates and terms.
14. 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, 1998, the Bank had
approximately $2,257,000 of
50
<PAGE>
14. DIVIDEND RESTRICTIONS (CONTINUED)
retained earnings available for dividends to the Company without being
required to seek special regulatory approvals.
15. EQUITY
DIVIDENDS DECLARED
During 1998, 1997, and 1996, the Company declared cash dividends of $.20,
$.14 and $.11 per share, respectively.
COMMON STOCK
On July 15, 1997, the Company issued 968,960 shares of common stock at $7
per share.
16. STOCK OPTIONS
The Company has long-term incentive plans that provide stock-based awards,
including stock options to certain key employees. The current terms of the
plan allow for a maximum grant of 270,000 shares. 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.
Options outstanding and the activity for December 31, 1998, 1997 and 1996
are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE GRANT AVERAGE GRANT AVERAGE GRANT
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Employee stock option plans:
Options outstanding at beginning
of year......................... 166,766 $ 4.32 149,016 $ 3.75 149,016 $ 3.75
Options granted................. 193,000 7.93 34,000 7.00 -- --
Options exercised............... -- -- 14,550 4.82 -- --
Options forfeited............... -- -- 1,700 4.00 -- --
--------- ----- --------- ----- --------- -----
Outstanding at end of year........ 359,766 $ 6.26 166,766 $ 4.32 149,016 $ 3.75
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Options exercisable at year-end... 184,500 $ 4.98 121,374 $ 3.99 -- --
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted-average fair value of
options granted during the year... $ 1.98 $ 2.05 --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," in accounting for its
stock option and award plans and has adopted the disclosure-only option
under SFAS No. 123, "Accounting for Stock-Based Compensation." If the
Company had adopted the accounting provisions of SFAS 123 and recognized
expense for the fair
51
<PAGE>
16. STOCK OPTIONS (CONTINUED)
value of employee stock options granted in 1998, 1997 and 1996, over the
vesting life of the options, pro forma net income would be indicated below
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income........................................ $ 2,679 $ 2,975 $ 2,313 $ 2,634 $ 2,973 $ 2,313
Basic earnings per common share................... $ 0.55 $ 0.69 $ 0.67 $ 0.54 $ 0.69 $ 0.67
Diluted earnings per common share................. 0.55 0.68 0.65 0.54 0.67 0.65
</TABLE>
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the
fair value of traded options, which have different characteristics than
employee stock options, and changes to the subjective assumptions used in
the model can result in materially different fair value estimates. The
weighted-average grant date fair values of the options granted during 1998,
1997 and 1996 were based on the following assumptions:
<TABLE>
<CAPTION>
RISK-FREE INTEREST RATES DIVIDEND YIELD
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Performance-Based Incentive and other stock
option plans................................... 4.62% 5.89% N/A 2.50% 2.86% N/A
</TABLE>
<TABLE>
<CAPTION>
EXPECTED LIVES VOLATILITY
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Performance-Based Incentive and other stock
option plans................................... 6 years 8 years N/A 0.25% 0.25% N/A
</TABLE>
Compensation expense under the fair value-based method is recognized over
the vesting period of the related stock options. Accordingly, the pro forma
results of applying SFAS No. 123 in 1998, 1997 and 1996 may not be
indicative of future amounts.
The following table summarizes information about stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------- ----------------------
AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
EXERCISE PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- ------------------------------------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$3.06-$3.64.......................... 49,226 2.59 $ 3.22 49,226 $ 6.44
$4.00-$4.68.......................... 67,108 7.54 4.14 67,108 7.54
$5.00-$8.00.......................... 243,432 10.98 7.61 68,166 7.09
--------- ----- ----- --------- -----
Total............................ 359,766 9.19 $ 6.36 184,500 $ 7.08
--------- ----- ----- --------- -----
--------- ----- ----- --------- -----
</TABLE>
17. 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 defer a portion of their salaries on a pretax basis. The
Company matches these deferrals on a pro rata basis as defined in the plan.
52
<PAGE>
17. EMPLOYEE BENEFITS (CONTINUED)
Contributions and administrative expenses related to the plan totaled
approximately $99,000, $84,000 and $55,000 for the years ended December 31,
1998, 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 1998, 1997 and 1996 were approximately $354,000, $319,000
and $269,000, respectively.
18. 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, 1998 and
1997, the Bank meets and exceeds all capital adequacy requirements to which
it is subject.
As of December 31, 1998, 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, 1998:
Total capital (to risk-weighted assets):
Consolidated........................... $ 30,987 16.6% $ 14,916 8.0% $ 18,645 10.0%
Bank................................... 24,122 12.8% 15,117 8.0% 18,896 10.0%
Tier I capital (to risk-weighted assets):
Consolidated........................... 29,112 15.6% 7,458 4.0% 11,187 6.0%
Bank................................... 22,247 11.8% 7,558 4.0% 11,337 6.0%
Tier I capital (to average assets):
Consolidated........................... 29,112 9.7% 12,009 4.0% 15,011 5.0%
Bank................................... 22,247 7.4% 11,978 4.0% 14,972 5.0%
</TABLE>
53
<PAGE>
18. CAPITAL (CONTINUED)
<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%
</TABLE>
19. 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 approximately $26,000,000 and
$12,211,000 at December 31, 1998 and 1997, 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 approximately
$2,022,000 and $1,551,000 of standby letters of credit outstanding at
December 31, 1998 and 1997, 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 Florida area. In
addition, the Bank occasionally purchases loans, primarily
54
<PAGE>
19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998 and 1997 was approximately $3.7 million and $2.9 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 not expected to
have a material adverse effect on the consolidated financial condition,
operations, or liquidity of the Company.
20. 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.
55
<PAGE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
NOTES PAYABLE
The carrying value of the Company's notes payable approximates fair value,
as the interest 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, 1998 and 1997.
The Company's financial instruments which have estimated fair values
differing from their respective carrying values are presented as follows at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Investment securities held to maturity.................... $ 2,940 $ 2,944 $ 8,096 $ 7,936
Net loans................................................. 185,140 185,780 158,154 158,343
Financial liabilities:
Time deposits............................................. 136,913 136,283 123,433 123,111
</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, 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, 1998 should not necessarily be considered to apply at
subsequent dates.
21. SUBSEQUENT EVENT
During February 1999, the Company sold 1,250,000 shares of common stock and
received proceeds from the issuance of approximately $11.4 million, net of
underwriting discount and expenses.
56
<PAGE>
22. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................. $ 6,005 $ 7,253
Investment in CNB National Bank....................................................... 23,913 23,057
Other assets.......................................................................... 988 176
--------- ---------
Total assets........................................................................ $ 30,906 $ 30,486
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable....................................................................... $ -- $ 1,450
Other liabilities................................................................... 10 11
--------- ---------
Total liabilities................................................................. 10 1,461
--------- ---------
Shareholders' equity:
Common stock........................................................................ 49 49
Additional paid-in capital.......................................................... 19,465 19,465
Retained earnings................................................................... 10,964 9,256
Unrealized gain on investment securities available for sale, net of taxes........... 418 255
--------- ---------
Total shareholders' equity........................................................ 30,896 29,025
--------- ---------
Total liabilities and shareholders' equity........................................ $ 30,906 $ 30,486
--------- ---------
--------- ---------
</TABLE>
57
<PAGE>
22. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY) (CONTINUED)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Dividend income................................................................. $ 1,853 $ 1,913 $ 1,913
Interest income................................................................. 328 195 28
Interest expense................................................................ (7) (169) (133)
--------- --------- ---------
Net interest and dividend income................................................ 2,174 1,939 1,808
Noninterest expense, net........................................................ (110) (40) (42)
--------- --------- ---------
Income before income taxes and equity in undistributed net income of
subsidiary.................................................................... 2,064 1,899 1,766
Income tax (liability) benefit.................................................. (79) 5 55
--------- --------- ---------
Income before equity in undistributed net income of subsidiary.................. 1,985 1,904 1,821
Equity in undistributed net income of subsidiary................................ 694 1,071 492
--------- --------- ---------
Net income...................................................................... $ 2,679 $ 2,975 $ 2,313
--------- --------- ---------
--------- --------- ---------
</TABLE>
58
<PAGE>
22. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY) (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 2,679 $ 2,975 $ 2,313
Adjustments to reconcile net income to net cash provided by operating
activities:
Undistributed earnings of subsidiary..................................... (694) (1,071) (492)
Changes in assets and liabilities:
Other assets........................................................... (135) 27 (172)
Other liabilities...................................................... -- (14) 1
--------- --------- ---------
Net cash provided by operating activities............................ 1,850 1,917 1,650
--------- --------- ---------
Cash flows from investing activities:
Cash paid related to land purchase......................................... (677) -- --
Cash paid related to acquisition, net of cash received..................... -- -- (2,670)
--------- --------- ---------
Cash flows from financing activities:
New borrowings under notes payable......................................... -- -- 2,650
Payments on notes payable.................................................. (1,450) (1,200) (950)
Redemption of convertible subordinated debentures.......................... -- -- (274)
Cash dividends............................................................. (971) (620) (379)
Proceeds from issuance of common stock..................................... -- 6,812 --
--------- --------- ---------
Net cash provided by financing activities................................ (2,421) 4,992 1,047
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents......................... (1,248) 6,909 27
Cash and cash equivalents, beginning of year................................. 7,253 344 317
--------- --------- ---------
Cash and cash equivalents, end of year....................................... $ 6,005 $ 7,253 $ 344
--------- --------- ---------
--------- --------- ---------
</TABLE>
59
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On October 24, 1997, the Company terminated its relationship with its
independent certified accountants, Osburn, Henning and Company, and on October
24, 1997, engaged Arthur Andersen LLP as its independent certified accountants.
Osburn, Henning and Company's reports on the consolidated financial statements
of the Company for fiscal year 1995 and 1996 contains no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to change accountants was
approved by the Company's Board of Directors. With respect to the Company's
consolidated financial statements for fiscal years 1995 and 1996 and the
subsequent interim periods preceding the change in accountants, there were no
disagreements between the Company and Osburn, Henning and Company on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
Osburn, Henning and Company, would have caused it to make reference to the
subject matter or the disagreement in connection with its report.
62
<PAGE>
PART III
Except for the information relating to the Company's executive officers and
its key employees, the material required by items 10 through 13 is hereby
incorporated by reference from the Company's definitive proxy statement pursuant
to Instruction G of Form 10-K. The Company will file its definitive Proxy
Statement with the Commission prior to April 15, 1999.
EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
3(i) Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement No. 33-71082, as amended, on
Form S-4 filed February 8, 1994).
3(ii) By-laws (Incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement No. 33-71082, as amended, on Form S-4 filed
February 8, 1994).
10(i) K. C. Trowell Employment Agreement (Incorporated by reference to
Exhibit 10(i) to the Company's Pre-Effective Amendment No. 1 to its
Registration Statement on Form S-2 filed as of January 26, 1999.)
10(ii) G. Thomas Frankland Employment Agreement (Incorporated by reference to
Exhibit 10(ii) to the Company's Pre-Effective Amendment No. 1 to its
Registration Statement on Form S-2 filed as of January 26, 1999.)
10(iii) 1998 Performance-Based Incentive Plan (Incorporated by reference to
Exhibit 99 to the Company's Registration Statement on Form S-8 filed
December 7, 1998).
21 Subsidiaries of the Registrant.
23(i) Consent of Arthur Andersen, LLP, independent certified public
accountants.
23(ii) Consent of Osburn, Henning & Company, independent certified public
accountants (Incorporated by reference to Exhibit 23(c) to the
Company's Registration Statement on Form S-8 filed December 7, 1998).
27 Financial Data Schedule.
</TABLE>
REPORTS ON FORM 8-K: None
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
CNB, INC.
-----------------------------------------
(REGISTRANT)
By: /s/ K.C. TROWELL
-----------------------------------------
K.C. Trowell
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Date: March 22, 1999
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ THOMAS R. ANDREWS
- ------------------------------ Director March 22, 1999
Thomas R. Andrews
/s/ AUDREY S. BULLARD
- ------------------------------ Director March 22, 1999
Audrey S. Bullard
/s/ RAYMON J. LAND
- ------------------------------ Director March 22, 1999
Raymon J. Land
/s/ MARVIN H. PRITCHETT
- ------------------------------ Director March 22, 1999
Marvin H. Pritchett
/s/ WILLIAM J. STREICHER
- ------------------------------ Director March 22, 1999
William J. Streicher
/s/ K. C. TROWELL
- ------------------------------ Director March 22, 1999
K. C. Trowell
Executive Vice President
/s/ G. THOMAS FRANKLAND and Chief Financial
- ------------------------------ Officer (Principal March 22, 1999
G. Thomas Frankland Financial Officer)
/s/ MARTHA S. WILLIAMS Sr. Vice President and
- ------------------------------ Controller (Principal March 22, 1999
Martha S. Williams Accounting Officer)
</TABLE>
64
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT
----------
SUBSIDIARIES OF THE REGISTRANT
----------
CNB, INC.
----------
EXHIBIT 21
64
<PAGE>
MARCH 22, 1999
Subsidiaries of CNB, Inc.
<TABLE>
<CAPTION>
State of
Subsidiary Organization Business Name
---------- ------------ -------------
<S> <C>
1. CNB NATIONAL BANK * CNB NATIONAL BANK
</TABLE>
*CNB NATIONAL BANK IS ORGANIZED AS A NATIONAL ASSOCIATION
65
<PAGE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
ANNUAL REPORT
-------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
-------------
CNB, INC.
-------------
EXHIBIT 23(i)
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-68459.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,630
<INT-BEARING-DEPOSITS> 11,007
<FED-FUNDS-SOLD> 25,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,337
<INVESTMENTS-CARRYING> 2,940
<INVESTMENTS-MARKET> 2,944
<LOANS> 187,015
<ALLOWANCE> 1,875
<TOTAL-ASSETS> 311,565
<DEPOSITS> 265,109
<SHORT-TERM> 12,570
<LIABILITIES-OTHER> 2,990
<LONG-TERM> 0
0
0
<COMMON> 49
<OTHER-SE> 30,847
<TOTAL-LIABILITIES-AND-EQUITY> 311,565
<INTEREST-LOAN> 15,877
<INTEREST-INVEST> 3,195
<INTEREST-OTHER> 2,047
<INTEREST-TOTAL> 21,119
<INTEREST-DEPOSIT> 9,051
<INTEREST-EXPENSE> 9,417
<INTEREST-INCOME-NET> 11,702
<LOAN-LOSSES> 710
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 9,298
<INCOME-PRETAX> 4,086
<INCOME-PRE-EXTRAORDINARY> 2,679
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,679
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 4.43
<LOANS-NON> 1,393
<LOANS-PAST> 22
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,495
<CHARGE-OFFS> 422
<RECOVERIES> 92
<ALLOWANCE-CLOSE> 1,875
<ALLOWANCE-DOMESTIC> 1,875
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
