SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE QUARTER PERIOD ENDED
SEPTEMBER 30, 1995
CNB BANCSHARES, INC. 0-11510
(Exact name of registrant as specified in its charter) (Commission file number)
INDIANA 35-1568731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20 N.W. THIRD STREET, EVANSVILLE, INDIANA 47739
(Address of principal executive office) (Zip Code)
(812) 464-3400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1995, there were 17,808,141 outstanding shares, without
par value, of the registrant.
Exhibit index is on page 25.
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet.......................... 1
Consolidated Condensed Statement
of Income......................................... 2
Consolidated Condensed Statement of
Changes in Shareholders' Equity................... 3
Consolidated Statement of Cash Flows................ 4
Notes to Consolidated Financial Statements.......... 5 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 12 - 22
PART II. Other Information..................................... 23
Signatures...................................................... 24
Exhibit Index................................................... 25
PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CNB BANCSHARES, INC.
Consolidated Balance Sheet
(In thousands except for share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
---------- ---------- ----------
Assets
- ------
Cash & due from banks $ 100,906 $ 120,331 $ 105,414
Interest bearing deposits in other banks 3,117 7,342 18,340
Federal funds sold and securities purchased under agreements to resell 9,526 29,700 15,750
---------- ---------- ----------
TOTAL CASH AND CASH EQUIVALENTS 113,549 157,373 139,504
Real estate loans held for sale 15,076 11,666 17,301
Investment securities available for sale 604,749 509,447 490,584
Investment securities held to maturity
(Market value $563,841 at September 30, 1995, $520,873 at
December 31, 1994, and $546,282 at September 30, 1994) 565,450 549,861 568,099
Loans, net of unearned income 2,179,234 2,118,126 2,042,973
Less: Allowance for loan losses 28,446 28,502 27,440
---------- ---------- ----------
NET LOANS 2,150,788 2,089,624 2,015,533
Premises & equipment 67,275 68,503 70,493
Other real estate owned 2,391 3,849 4,964
Interest receivable and other assets 90,360 71,016 71,178
---------- ---------- ----------
TOTAL ASSETS $3,609,638 $3,461,339 $3,377,656
========== ========== ==========
Liabilities
- -----------
Deposits:
Non-interest bearing $ 295,634 $ 307,809 $ 296,506
Interest bearing 2,493,264 2,287,647 2,347,191
---------- ---------- ----------
TOTAL DEPOSITS 2,788,898 2,595,456 2,643,697
Securities sold under repurchase agreements 309,786 319,965 310,752
Federal funds purchased 20,070 27,000 27,280
Other short-term borrowings 12,477 9,938 11,262
Long-term debt 153,954 210,061 74,559
Interest payable and other liabilities 36,066 25,091 24,396
---------- ---------- ----------
TOTAL LIABILITIES 3,321,251 3,187,511 3,091,946
Shareholders' equity
- --------------------
Preferred stock, no par or stated value
Shares authorized & unissued: 2,000,000
Common stock, $1 stated value
Shares authorized: 50,000,000
Shares issued: 17,853,193 at September 30, 1995, 17,204,746 at
December 31, 1994, and 15,642,151 at September 30, 1994 17,853 17,205 15,642
Capital surplus 247,597 239,533 186,070
Retained earnings 21,007 25,024 83,857
Net unrealized gains (losses) on investment securities available for
sale 1,930 (7,934) 141
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 288,387 273,828 285,710
---------- ---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,609,638 $3,461,339 $3,377,656
========== ========== ==========
See notes to consolidated financial statements.
Page l of 26
CNB BANCSHARES, INC.
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(In thousands, except for share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
---- ---- ---- ----
INTEREST INCOME
Loans, including fees:
Taxable $ 49,733 $ 41,657 $ 144,776 $ 117,544
Tax exempt 420 423 1,281 1,189
Investment securities:
Taxable 17,657 14,010 50,561 40,366
Tax exempt 1,325 1,240 3,697 3,635
Real estate loans held for sale 562 405 1,411 2,299
Federal funds sold and securities purchased
under agreements to resell 331 217 993 878
Interest bearing deposits in other banks 55 148 269 494
----------- ----------- ----------- -----------
Total interest income 70,083 58,100 202,988 166,405
INTEREST EXPENSE
Deposits 28,734 21,715 79,510 64,830
Short-term borrowings 4,464 3,510 13,660 6,997
Long-term debt 3,374 1,635 10,631 5,570
----------- ----------- ----------- -----------
Total interest expense 36,572 26,860 103,801 77,397
----------- ----------- ----------- -----------
NET INTEREST INCOME 33,511 31,240 99,187 89,008
Provision for loan losses 979 1,997 4,030 5,225
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 32,532 29,243 95,157 83,783
NON-INTEREST INCOME
Net securities gains 86 157 1,288 1,496
Other non-interest income 12,412 12,125 33,273 35,243
----------- ----------- ----------- -----------
Total non-interest income 12,498 12,282 34,561 36,739
NON-INTEREST EXPENSE
Salaries, benefits, occupancy,
other operating expenses 29,068 28,292 88,030 83,780
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 15,962 13,233 41,688 36,742
Income taxes 5,926 4,663 15,407 12,825
----------- ----------- ----------- -----------
NET INCOME $ 10,036 $ 8,570 $ 26,281 $ 23,917
=========== =========== =========== ===========
NET INCOME PER SHARE:
PRIMARY NET INCOME PER SHARE $ 0.55 $ 0.47 $ 1.44 $ 1.33
=========== =========== =========== ===========
FULLY DILUTED NET INCOME PER SHARE $ 0.55 $ 0.46 $ 1.44 $ 1.31
=========== =========== =========== ===========
AVERAGE AND EQUIVALENT SHARES OUTSTANDING 18,147,678 18,320,771 18,267,703 18,041,783
=========== =========== =========== ===========
See notes to consolidated financial statements.
Page 2 of 26
CNB BANCSHARES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
---- ---- ---- ----
BEGINNING BALANCE $ 284,272 $ 273,339 $ 273,828 $ 271,778
Net income 10,036 8,570 26,281 23,917
Cash dividends declared (3,579) (3,086) (10,140) (9,301)
Purchase and retirement of common stock (10,410) (2,041) (21,265) (9,847)
Issuance of common stock related to
acquisition of subsidiaries 5,879 9,969 5,879 9,969
Issued pursuant to employee benefit plans - - 219 385
Dividends reinvested 761 679 2,394 1,997
Stock options exercised 643 33 1,079 250
Exercise and conversion of stock
purchase contracts and debentures 33 873 248 2,881
Change in unrealized gains/losses on
investment securities available for sale 752 (2,626) 9,864 (6,319)
----------- ----------- ----------- -----------
ENDING BALANCE $ 288,387 $ 285,710 $ 288,387 $ 285,710
=========== =========== =========== ===========
See notes to consolidated financial statements.
Page 3 of 26
CNB Bancshares, Inc.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
Operating Activities:
Net income $ 26,281 $ 23,917
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,048 6,769
Provision for loan losses 4,030 5,225
Amortization of securities' premiums and discounts 1,118 2,062
Net gains on securities (1,288) (1,496)
Loans originated for sale (131,375) (413,439)
Proceeds from sale of loans 127,965 434,638
Increase in other assets, net of amortization (20,443) (640)
Increase (decrease) in other liabilities 9,213 (1,369)
--------- ---------
Net Cash Provided by Operating Activities 23,549 55,667
Investing Activities:
Cash and cash equivalents of subsidiaries acquired, net of
purchase price 3,935 5,708
Proceeds from the maturity of investment securities available
for sale 94,579 193,039
Proceeds from the sale of investment securities available
for sale 175,122 156,249
Purchase of investment securities available for sale (313,213) (122,858)
Proceeds from the maturity of investment securities held to
maturity 37,123 48,036
Purchase of investment securities held to maturity (62,716) (343,972)
Net increase in loans (37,870) (158,294)
Purchase of bank premises and equipment (6,542) (4,977)
--------- ---------
Net Cash Used by Investing Activities (109,582) (227,069)
Financing Activities:
Net increase (decrease) in deposits 140,703 (29,279)
Net increase (decrease) in short-term borrowings (15,445) 202,684
Payment of long-term debt (189,711) (103,869)
Proceeds from long-term borrowings 133,795 72,265
Proceeds from exercise of stock options 1,079 250
Payment of cash dividends (9,341) (8,898)
Proceeds from common stock issued for dividend reinvestment
plan 2,394 1,997
Purchase and retirement of common stock (21,265) (9,847)
--------- ---------
Net Cash Provided by Financing Activities 42,209 125,303
--------- ---------
Net Decrease in Cash and Cash Equivalents (43,824) (46,099)
Cash and Cash Equivalents at January 1, 157,373 185,603
--------- ---------
Cash and Cash Equivalents at September 30, $ 113,549 $ 139,504
========= =========
Supplemental disclosure:
Cash paid for:
Interest $ 100,317 $ 76,978
Income taxes 15,662 12,920
Non-cash investing and financing activities:
Common stock issued for acquisitions 5,879 9,969
Other real estate transfers 1,087 979
Stock issued in exchange of debentures and equity contracts 258 3,057
Reclassification of investment securities available for sale,
related to merger 22,492
Premises and equipment reclassified to other assets 3,285
Page 4 of 26
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of CNB Bancshares,
Inc. (Corporation) and its wholly-owned subsidiaries, after elimination of all
material intercompany accounts and transactions.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and do not include all the information and footnotes
required for a complete presentation of statements. The Corporation's
accounting and reporting policies for interim financial reporting are consistent
with those followed for annual financial reporting. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results of operations for the periods reported
have been included in the foregoing interim consolidated financial statements.
The interim results of operations presented are not necessarily indicative of
the results that may be expected for the full year. A description of the
Corporation's current accounting policies is contained in the 1994 Annual Report
to Shareholders.
NOTE 2: ACCOUNTING FOR IMPAIRED LOANS
Effective January 1, 1995, the Corporation adopted Financial Accounting
Standards Board Statement No. 114 "Accounting by Creditors for Impairment of a
Loan" which was amended by statement No. 118. These accounting standards
require that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or the fair
value of the underlying collateral. The adoption of these standards did not
have a material impact on the Corporation's financial position or results of
operations since the method prescribed by the standard was not significantly
different from that historically used by the Corporation.
NOTE 3: ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
During May, 1995, the Financial Accounting Standards Board issued Statement
No. 122, "Accounting for Mortgage Servicing Rights," (FAS 122) which amended
Statement No. 65, "Accounting for Certain Mortgage Banking Activities." FAS 122
requires the recognition of originated mortgage servicing rights ("OMSRs"), as
well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating
total costs incurred between the loan and the servicing rights based on their
relative fair values. Under FAS No. 65, the cost of OMSRs was not recognized as
an asset and was charged to earnings when the related loan was sold. FAS 122
also requires that all capitalized mortgage servicing rights ("MSRs") be
evaluated for impairment based on the excess of the carrying amount of the MSRs
over their fair value as of the financial statement date. The Corporation
adopted FAS 122 effective January 1, 1995.
The impact of recognizing OMSRs as assets in the Corporation's financial
statements in accordance with FAS 122 was an increase in non-interest income of
$165,000 and $324,000 for the three and nine months ended September 30, 1995,
respectively. OMSRs of $337,000 were capitalized during the first nine months
of 1995. For purposes of measuring impairment, the Corporation stratified MSRs
on
Page 5 of 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3: ACCOUNTING FOR MORTGAGE SERVICING RIGHTS (CONTINUED)
the basis of loan term, interest rate and type of interest rate (fixed or
adjustable). The servicing assets were reduced only by normal amortization of
$13,000 and no valuation allowance was required at September 30, 1995.
NOTE 4: BUSINESS COMBINATIONS
On August 4, 1995, the Corporation issued 2,370,208 shares of its common stock
in exchange for all of the outstanding common shares of UF Bancorp, Inc. (UF),
parent company for Union Federal Savings Bank, Evansville, Indiana (Union
Federal) and reserved 182,032 shares for future issuance due to outstanding UF
stock options. At that time, Union Federal was merged into the Corporation's
lead bank, The Citizens National Bank of Evansville. Simultaneous with the
merger, certain Union Federal offices located outside the Evansville, Indiana,
market were transferred, via purchase and assumption transactions, to other
subsidiary banks of the Corporation operating in those markets. The merger was
accounted for under the pooling of interests method of accounting and,
accordingly, all financial data of the Corporation for prior periods has been
restated to include the financial position and operating results of UF.
Separate operating results of the combined entities for the periods prior to
the merger were as follows:
SIX MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 1995 SEPTEMBER 30, 1994
Net interest income:
CNB Bancshares, Inc. $59,150 $78,640
UF Bancorp, Inc. 6,526 10,368
----------------------------------------------------------
Combined $65,676 $89,008
==========================================================
Net income:
CNB Bancshares, Inc. $14,519 $20,705
UF Bancorp, Inc. 1,726 3,212
----------------------------------------------------------
Combined $16,245 $23,917
==========================================================
Effective August 4, 1995, the Corporation issued 334,420 shares of its common
stock in exchange for all of the outstanding shares of The Bank of Orleans,
Indiana (Orleans). The acquisition was accounted for under the pooling of
interests method of accounting without restatement of prior periods, as the
amounts involved were not material to the Corporation's financial results.
Also on August 4, 1995, a subsidiary of the Corporation, Citizens Bank of
Western Indiana, acquired the four Indiana offices of Household Bank, f.s.b., a
subsidiary of Household International and assumed deposit liabilities of
$78,879,000. Goodwill of $5,043,000 is being amortized on a straight-line basis
over 15 years. The acquisition was accounted for under the purchase method of
accounting and, accordingly, the consolidated financial statements include the
assets and liabilities from the August 4, 1995, transaction date forward.
Page 6 of 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4: BUSINESS COMBINATIONS (CONTINUED)
On February 1, 1995, the Corporation issued 685,069 shares of its common stock
in exchange for all of the outstanding shares of King City Federal Savings Bank,
Mt. Vernon, Illinois (King City). In addition, the Corporation reserved an
additional 60,340 shares for future issuance due to outstanding King City stock
options. The Corporation issued 504,351 shares of its common stock on February
10, 1995, in exchange for all of the outstanding shares of Harrisburg
Bancshares, Inc., holding company for the Harrisburg National Bank, Harrisburg,
Illinois, (Harrisburg). Both mergers were accounted for under the pooling of
interests method of accounting and, accordingly, all financial data of the
Corporation for prior periods has been restated to include the financial
position and operating results of King City and Harrisburg. On May 6, 1995,
First National Bank of Effingham, a wholly-owned subsidiary of the Corporation,
was merged into Harrisburg and the resulting institution was renamed Citizens
Bank of Illinois, N.A. On June 24, 1995, King City was also merged into
Citizens Bank of Illinois, N.A.
On December 1, 1994, the Corporation issued 437,614 shares of its common stock
in exchange for all of the outstanding common shares of Citizens Realty and
Insurance, Inc., Evansville, Indiana. The transaction was accounted for under
the pooling of interests method of accounting and, accordingly, all financial
data of the Corporation for prior periods has been restated to include the
financial position and operating results of Citizens Realty and Insurance, Inc.
Page 7 of 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5: INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
Investment Securities Available for Sale
at September 30, 1995:
U.S. Treasury $ 34,273 $ 260 $ (299) $ 34,234
Federal agencies:
Bonds and notes 174,610 1,587 (373) 175,824
Mortgage-backed securities 251,015 5,497 (3,360) 253,152
State and municipal securities 3,718 219 (10) 3,927
Collateralized mortgage obligations 117,242 2,005 (2,311) 116,936
Other securities 20,749 101 (174) 20,676
- -------------------------------------------------------------------------------------------------
Total $601,607 $9,669 $(6,527) $604,749
=================================================================================================
Investment Securities Held to Maturity
at September 30, 1995:
Federal agencies:
Bonds and notes $ 524 $ 16 $ (6) $ 534
Mortgage-backed securities 464,813 1,705 (7,180) 459,338
State and municipal 96,703 5,399 (1,526) 100,576
Collateralized mortgage obligations 3,410 6 (23) 3,393
- -------------------------------------------------------------------------------------------------
Total $565,450 $7,126 $(8,735) $563,841
=================================================================================================
Net unrealized gains or (losses) on investment securities available for
sale, net of tax, at December 31, 1994 and September 30, 1995 and 1994, were
($7,934,000), $1,930,000 and $141,000, respectively. The amortized cost and
estimated market value of investment securities at September 30, 1995, by
contractual maturity, are shown in the following table. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
INVESTMENT SECURITIES INVESTMENT SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
Maturity distribution
at September 30, 1995:
Due in one year or less $ 13,095 $ 13,151 $ 8,239 $ 8,304
Due after one year through five years 2,144 2,256 26,697 27,991
Due after five years through ten years 189,349 190,423 5,104 6,564
Due after ten years 8,013 8,155 57,187 58,251
Mortgage-backed securities 368,257 370,088 468,223 462,731
- --------------------------------------------------------------------------------------------
Total debt securities 580,858 584,073 565,450 563,841
Equity securities 20,749 20,676
- --------------------------------------------------------------------------------------------
Total $601,607 $604,749 $565,450 $563,841
============================================================================================
Page 8 of 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5: INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
(CONTINUED)
During the nine months ended September 30, 1995, $22,492,000 of investment
securities were transferred from held to maturity to available for sale. This
reclassification was necessitated to conform the investment portfolios of the
recently acquired institutions, King City and Harrisburg, to the Corporation's
policy for credit risk and interest rate risk.
Proceeds from sales of investment securities available for sale during the
nine months ended September 30, 1995, were $175,122,000. Gross gains and losses
realized on those sales were as follows. The gains related to investment
securities held to maturity were due to the call of certain securities prior to
their maturities.
INVESTMENT INVESTMENT
SECURITIES SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY TOTAL
NINE MONTHS ENDED SEPTEMBER 30, 1995
Gross gains from sales
and called bonds $ 2,535 $42 $ 2,577
Gross losses from sales (1,289 ) (1,289)
- -----------------------------------------------------------------------------------------
Net securities gains $ 1,246 $42 $ 1,288
=========================================================================================
NOTE 6: INTEREST RATE CONTRACTS
Through the purchase of interest rate cap agreements, (caps) the Corporation
has reduced the potential impact of increased interest rates related to certain
repurchase agreements and long-term borrowings being hedged. These caps entitle
the Corporation to receive periodic payments from counterparties based upon the
notional amount of the caps and the excess of the index rate over the strike
price. Amortization of premiums paid for interest rate caps totaled $962,000 and
$675,000 for the nine months ended September 30, 1995 and 1994, respectively.
This expense was offset by counterparty reimbursements of $1,059,000 during the
nine months ended September 30, 1995, and $34,000 during the nine months ended
September 30, 1994.
At September 30, 1995, the notional amount of the interest rate caps was
$135,000,000. The caps are indexed to LIBOR with contract strike prices ranging
from 4 percent to 7 percent and mature in 1997. The carrying value and estimated
market value of the caps at September 30, 1995, was $1,819,000 and $1,588,000,
respectively. The Corporation is exposed to credit losses in the event of
nonperformance by the counterparties but has no off-balance sheet credit risk of
accounting loss. Although collateral or other security is not obtained, the
Corporation minimizes its credit risk by monitoring the credit standing of the
counterparties and anticipates that the counterparties will be able to fully
satisfy their obligation under the agreements.
Page 9 of 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7: STOCK DIVIDEND
On October 18, 1994, the Corporation declared a one-for-ten stock dividend,
distributed December 9, 1994. A one-for-twenty stock dividend was declared on
October 18, 1995, payable November 20, 1995. All share data included in the
financial statements, notes and Management's Discussion and Analysis has been
adjusted for these stock dividends.
NOTE 8: NET INCOME PER SHARE
Primary net income per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding during each period. Fully diluted net income per share has been
computed based on the weighted average number of common and common share
equivalents outstanding during each period assuming conversion of the
convertible subordinated debentures into common shares and the elimination from
net income of the related interest expense, less income tax effect. The assumed
conversion of the convertible subordinated debentures into common shares had no
materially dilutive effect on primary net income per share for either the three
months or nine months ended September 30, 1995.
Page 10 of 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9: LONG-TERM DEBT (IN THOUSANDS)
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
Convertible subordinated debentures,
7.50%, redemption of $1,125 annually
beginning in 2001, balance due 2011 $ 6,601 $ 6,785 $ 6,980
Redeemable subordinated debentures,
9.50% due 1997 2,192 2,266 2,266
Notes payable:
9.81%, payable $600 annually through
1996, balance due in 1997 3,600 3,600 4,200
7.75%, adjusted with changes in Prime,
payable $75 quarterly through 1998 2,196
6.63%, adjusted monthly with
changes in LIBOR, payable $250 5,750
quarterly through 2000
6.25%, adjusted quarterly with
changes in LIBOR, payable $250
quarterly through 2000 6,000 6,250
10.00%, payable in 2000 3,250 3,250
Federal Home Loan Bank advances
with weighted average rates of
5.90%, 6.13% and 7.51% at
September 30, 1995, December 31,
1994,and September 30, 1994,
respectively:
Payable in 1994 5,000
Payable in 1995 10,000 120,987 16,976
Payable in 1996 67,993 18,000 3,000
Payable in 1997 9,864
Payable in 1999 and after 27,926 27,933 5,800
Mortgage notes payable:
2.00%, payable $75 annually
including interest,
due year 2032 (Federal Urban
Development Grant Program) 1,941 1,977 1,977
Notes payable, revolving credit
agreement, secured by finance
receivables:
6.63%, adjusted quarterly with
changes in LIBOR 14,882 9,102 6,917
Fixed rate borrowings at 7.50%
to 8.20%, payable in 1995 6,500 6,500
Other, including capitalized
leases 3,205 3,661 3,247
-------- -------- -------
Total $153,954 $210,061 $74,559
================================================================================
Qualifying unencumbered mortgage loans held in the loan portfolio that equal
at least 170 percent of the aggregate amount of advances have been pledged as
collateral for the Federal Home Loan Bank advances.
Page 11 of 26
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Net income for the three months ended September 30, 1995, was $10,036,000, an
increase of 17.1 percent over the $8,570,000 earned in the same period of 1994.
Fully diluted net income per share, adjusted for the 5% stock dividend declared
October 18, 1995, increased by 19.6 percent to $.55 for the three months ended
September 30, 1995 compared to $.46 for the three months ended September 30,
1994. Net income for the first nine months of 1995 was $26,281,000 compared to
$23,917,000 earned in the same period of 1994, an increase of 9.9 percent. Fully
diluted earnings per share was $1.44 and $1.31 for the nine months ended
September 30, 1995 and 1994, respectively. The increased earnings improvement
was due to an improved net interest margin and continued growth in earning
assets which resulted in an 11.4 percent increase in net interest income over
the first nine months of 1994. The net interest margin was 4.13 percent for the
nine months ended September 30, 1995 compared to 4.05 percent for the nine
months ended September 30, 1994. During the first nine months of 1995, average
earning assets were 8.8 percent greater than during the same period of 1994.
Net income of $10,036,000 and fully diluted net income per share of $.55 for
the third quarter of 1995 were also increased over 1995 second quarter results
of $8,331,000 and $.46 per share.
The Corporation's total assets at September 30, 1995, were $3,609,638,000,
which were 6.9 percent greater than the $3,377,656,000 at September 30, 1994,
and 4.3 percent greater than total assets at December 31, 1994. Total loans of
$2,179,234,000 at September 30, 1995, were increased from $2,118,126,000 at
December 31, 1994, and $2,042,973,000 from one year ago.
Annualized returns on average assets and average shareholders' equity for the
nine months ended September 30, 1995, were 1.00 percent and 12.30 percent,
respectively, compared with .98 percent and 11.66 percent for the same period of
1994. For the quarter ended September 30, 1995, annualized returns on average
assets and average shareholders' equity were 1.12 percent and 14.11 percent,
respectively, compared to 1.03 percent and 12.15 percent in the third quarter of
1994.
Cash dividends, adjusted for the 5 percent stock dividend declared October 18,
1995, of $.20 per share were declared during the third quarter of 1995 compared
with $.19 per share during the same period of 1994, representing an increase of
5.3 percent. For the nine months ended September 30, 1995 and 1994, total
dividends declared were $10,140,000 and $9,301,000, respectively.
Page 12 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INTEREST INCOME
- -------------------
Net interest income is the Corporation's largest component of income and
represents the difference between interest and fees earned on loans and
investments and the interest paid on interest bearing liabilities. Net interest
income was $99,187,000 for the nine months ended September 30, 1995, compared
with $89,008,000 for the same period in 1994. Net interest income for the most
recent quarter was $33,511,000 compared to $31,240,000 for the three months
ended September 30, 1994. The increased net interest income was the result of an
8.1 percent and 8.8 percent increase in average earning assets on a quarter and
year-to-date basis, respectively, compared to 1994 periods, and an improved net
interest margin. Net interest income for the most recent quarter was $726,000
greater than the $32,785,000 recorded in the second quarter of 1995 due to the
effects of a slightly lower net interest margin offsetting a $93,629,000
increase in average earning assets.
The interest margin is a percentage computed by dividing net interest income
on a fully taxable equivalent basis ("FTE") by average earning assets and
represents a measure of basic earnings on interest bearing assets held by the
Corporation. The annualized net interest margins were 4.13 percent and 4.05
percent, respectively, for the nine months ended September 30, 1995 and 1994.
Average earning assets for the nine months ended September 30, 1995, increased
to $3,284,685,000 from $3,019,177,000 for the same period in 1994. Average loans
increased by $214,542,000 to $2,129,485,000 for the first nine months of 1995
and represented 64.8 percent of earning assets compared to 63.4 percent in 1994.
Investment securities increased by 9.5 percent for the first nine months of 1995
compared to 1994 and represented 33.6 percent and 33.4 percent of earning assets
for similar periods of 1995 and 1994, respectively. The prime lending rate has
increased by 275 basis points since the beginning of 1994 resulting in loans,
particularly commercial loans, repricing to a greater extent than deposits and
borrowed funds. However, the prime rate has been less volatile during the
current year, increasing by 50 basis points during the first half of 1995 and
decreasing by 25 basis points during the third quarter. This has resulted in the
net interest margin for the most recent quarter decreasing slightly to 4.07
percent compared to 4.21 percent and 4.13 percent for the first and second
quarters of 1995. The net interest margin for the third quarter of 1994 was 4.10
percent.
An ongoing objective of the Corporation's asset/liability management policy is
to match rate-adjustable assets and liabilities at similar maturity horizons so
that changes in interest rates will not result in wide fluctuations in net
interest income. The rate sensitivity position is computed for various repricing
intervals by calculating rate sensitivity gaps. The Corporation had a cumulative
one-year positive gap on September 30, 1995, of $87,769,000 which represented
2.6 percent of the $3,377,152,000 in earning assets at that date and, in the
opinion of management, represented a relatively balanced position. Net interest
income at financial institutions with positive gaps tends to increase in periods
of rising interest rates and decline as interest rates fall.
NON-INTEREST INCOME
- -------------------
During the first nine months of 1995, non-interest income, which includes
deposit fees, insurance commissions, trust fees, credit card and other non-
interest fees on loans, net gains and servicing fees on real estate loans sold,
brokerage commissions, and net securities gains, was $34,561,000 compared to
$36,739,000 reported for the same period in 1994. Net security gains of
$1,288,000 were recorded during the first three quarters of 1995 compared to
$1,496,000 for the same period of 1994. Security
Page 13 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST INCOME (CONTINUED)
- -------------------
gains of $1,072,000 were recorded during the second quarter of 1995 as the
Corporation chose to minimize the increased prepayment risks in the then current
interest rate environment by selling certain higher coupon 15 year and balloon
mortgage backed securities. Proceeds were reinvested in mortgage backed
securities and agency bonds. The 1994 gains resulted as the Corporation took
advantage of a steep yield curve by selling certain U.S. Treasury notes at gains
and reinvesting the proceeds in mortgage-backed securities with higher current
yields and only slightly longer estimated average lives. Year-to-date non-
interest income excluding net securities gains totaled $33,273,000, which
represented a decrease of 5.6 percent over the same period of 1994. Non-interest
income for the third quarter of 1995 was 1.8 percent greater than that reported
for the same quarter of 1994. Non-interest income excluding net securities gains
of $86,000 for the most recent quarter was increased by 2.4 percent from the
$12,125,000 for the third quarter of 1994 and 15.6 percent or $1,678,000 greater
than recorded for the second quarter of 1995.
NON-INTEREST INCOME
- --------------------------------------------------------------------------------
(IN THOUSANDS)
NINE MONTHS
ENDED
SEPTEMBER 30, INCREASE
1995 1994 (DECREASE)
Service charges on deposit accounts $ 7,943 $ 6,877 $ 1,066
Net gains and servicing fees on loans 5,560 6,126 (566)
sold
Credit card and other non-interest fees 4,554 4,631 (77)
on loans
Insurance premiums and commissions 4,640 5,084 (444)
Trust fees 3,847 3,341 506
Investment products fees 2,214 2,001 213
Net securities gains 1,288 1,496 (208)
Other 4,515 7,183 (2,668)
------- ------- -------
Total non-interest income $34,561 $36,739 $(2,178)
================================================================================
Service charges on deposit accounts were increased by $1,066,000 or 15.5
percent due to increased volumes and revised fee schedules. Net gains and
servicing fees on loans sold decreased by $566,000 during the first three
quarters of 1995 compared to 1994. Two wholly-owned mortgage banking
subsidiaries discontinued loan originations, one during the fourth quarter of
1993 and the second during the second quarter of 1995. These subsidiaries, based
on the East and West Coasts and generating only marginal net operating results,
did not coincide with the Corporation's strategic plans. The volume of mortgage
loan originations and the resulting gains on sales of loans has decreased due to
this discontinuation and due to interest rates which have risen over the past
year. Additionally, the Corporation has elected to hold certain residential
mortgage loans in its portfolio due to the current interest rate environment
rather than selling the loans in the secondary market. During the quarter ended
September 30, 1995, the Corporation sold mortgage servicing rights on a $220
million servicing portfolio, generating a gain of $1.8 million. The adoption of
FAS 122, as discussed previously, resulted in additional income of $324,000
during the first three quarters of 1995. Revenues from insurance premiums and
commissions decreased by $444,000 during the first three quarters of 1995
compared to
Page 14 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-INTEREST INCOME (CONTINUED)
- -------------------
1994. Profit-sharing bonuses received during 1995, which are experience related
and associated with prior year property and casualty policies, were $361,000
lower than payments received during the same period of 1994. Trust fees, based
primarily on the market value of assets under management, increased by $506,000
or 15.1 percent compared to the first nine months of 1994 due to an increase in
the number of accounts and an increase in the market value of assets managed.
Other income decreased to $4,515,000 during the nine months ended September 30,
1995 from $7,254,000 for the comparable period of 1994. The first quarter of
1994 included gains of $364,000 and $479,000, respectively, associated with the
sale and change in market value of interest rate caps in accordance with hedge
accounting rules where the hedged liabilities were terminated during the first
quarter of 1994. The sale of an inactive banking charter of a wholly-owned
subsidiary generated a gain of $1,450,000 during the third quarter of 1994.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense, which includes personnel, occupancy costs, equipment and
other operating expenses was $88,030,000 for the nine months ended September 30,
1995, compared to $83,780,000 for the same period of 1994, an increase of 5.1
percent.
NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------
(IN THOUSANDS)
NINE MONTHS
ENDED
SEPTEMBER 30, INCREASE
1995 1994 (DECREASE)
Salaries and employee benefits $43,418 $41,839 $ 1,579
Occupancy expense 5,968 5,938 30
Equipment expense 5,058 5,072 (14)
Data processing and other services 8,832 5,264 3,568
FDIC assessments 3,348 4,652 (1,304)
Professional fees 2,798 2,642 156
Advertising and promotion 2,586 2,099 487
Printing and supplies 2,706 2,314 392
Postage and freight 2,314 1,993 321
Amortization of intangible assets 1,261 1,119 142
Other 9,741 10,848 (1,107)
------- ------- -------
Total non-interest expense $88,030 $83,780 $ 4,250
================================================================================
Page 15 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON INTEREST EXPENSE, CONTINUED
- --------------------
Salaries and employee benefits increased by $1,579,000 or 3.8 percent for the
nine month period in 1995 over 1994. This increase was generally due to normal
salary increases, additional staff and related expenses associated with
increased business activity. Data processing and other services in 1995 have
increased by $3,568,000 primarily due to the agreement with ALLTEL Information
Services Inc., which provides data processing software systems and computer
equipment and operates the Corporation's data processing facility. The
agreement was effective December 1992 but provided for a transition to the full
contracted service over a period which ended December 31, 1994. Increased data
processing expenses have been partially offset by reductions in personnel,
equipment and other expenses as the agreement became fully effective January 1,
1995. In addition to on-going processing expenses, 1995 expense includes
approximately $220,000 of expense associated with the conversion of UF Bancorp,
which was merged with the Corporation during the third quarter of 1995. FDIC
assessments decreased by $1,304,000 during the nine months ended September 30,
1995 compared the same period of 1994. The assessment rate was reduced from
$.23 per $100 of deposits to $.04 due to the Bank Insurance Fund becoming fully
capitalized effective June 1, 1995. Although the reduced FDIC rate is expected
to continue in the fourth quarter of 1995 and full year 1996, legislation is
currently pending in Congress that would impose a one-time assessment to
recapitalizing the FDIC Savings Association Insurance Fund (SAIF). If enacted,
the special assessment on the Corporation's SAIF insured deposits could be a
pre-tax charge of approximately $7.3 million followed by reduced on-going
assessments. Advertising and promotion expense increased by $487,000 during the
first three quarters of 1995 compared to 1994 due to increased marketing efforts
related to loan and deposit promotions, Corporate identity promotions due to
mergers and acquisitions and generally higher levels of business activity.
Expenses for printing and supplies and postage and freight have increased by
$392,000 and $321,000, respectively, during the first nine months of 1995
compared to 1994 due primarily to the acquisition, merger and conversion of the
Corporation's Illinois banks, completed during June 1995 and the acquisition of
UF Bancorp and Household Bank, completed during August 1995. Postage expense
was also negatively impacted by the increased postal rates, effective January 1,
1995. Other expenses were decreased by $1,107,000 during the first nine months
of 1995 compared to the same period of 1994. Reserves for warranty losses of
$791,000 were expensed during the nine months ended September 30, 1994. These
reserves are for potential liabilities due to representations and warranties
made to purchasers of loans and mortgage servicing rights of loans originated by
two Union Federal mortgage banking companies. Nothing was charged to the
warranty reserve in 1995. Expenses related to the management of other real
estate owned were reduced by $207,000 during the first nine months of 1995
compared to the same period of 1994 as several properties have been sold.
The Corporation continues its efforts to maintain control of its operating
costs and has implemented several strategies to further improve operating
efficiencies, including consolidating certain subsidiary banks in adjacent
markets and centralizing backroom operations. Operating expenses as a
percentage of revenues, commonly referred to as the efficiency ratio, improved
from 65.40 percent to 64.67 percent during the first nine months of 1994 and
1995, respectively. This ratio was further improved to 62.06 percent for the
most recent quarter.
Page 16 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX EXPENSE
- ------------------
Income tax expense was $15,407,000 for the nine months ended September 30,
1995, compared with $12,825,000 for the same period in 1994. The effective tax
rate for the current period increased to 37.0 percent from 34.9 percent for the
nine months ended September 30, 1994. This increase is primarily due to the
acquisition of Citizens Realty and Insurance, Inc., which did not pay corporate
income tax in 1994 as the former shareholders elected to be treated as an S
Corporation for income tax purposes. As such, the corporate income was passed
directly to the shareholders and combined with their taxable income on their
personal returns. Additionally, the Corporation continues to derive a lesser
portion of its total revenue from tax-exempt sources as the supply of qualified
tax-exempt securities and loans is limited.
LOANS
- -----
Total loans were $2,179,234,000 at September 30, 1995, compared to
$2,042,973,000 at September 30, 1994, and $2,118,126,000 at December 31, 1994.
The loan portfolio was increased by $61.1 million from year-end 1994 and by
$136.3 million or 6.7 percent from one year ago. Commercial and industrial
loans and agricultural production loans grew by 9.3 percent and 17.5 percent,
respectively, from September 30, 1994. Commercial and industrial loans were also
increased by $15.9 million from year-end. Tax exempt loans declined from one
year ago by $2.8 million. Total real estate mortgage loans were $47.3 million
greater at September 30, 1995, than at December 31, 1994, and $115.5 million
greater than one year ago. The Corporation has continued to experience demand
for new residential real estate mortgage loans, but has seen the demand for
mortgage refinancings diminish due to the present interest rate environment.
Customer preference in the current rate environment has shifted from adjustable
rate residential real estate loans to fixed rate 15-year and shorter term
balloon loans which the Corporation generally holds rather than selling in the
secondary market. In addition to residential real estate mortgages reported as
loans, the Corporation held $15,076,000 and $11,666,000 of real estate loans for
sale at September 30, 1995, and December 31, 1994, respectively, which were
anticipated to be sold in the secondary market. These loans were $17,301,000 at
September 30, 1994.
Consumer loans at September 30, 1995, were $8.7 million or 1.6 percent less
than at September 30, 1994, and $8.2 million less than at December 31, 1994.
Direct consumer loan demand has continued through 1995 due to direct mail and
in-office promotions, for both fixed and variable rate automobile and other
personal loans. The volume of new indirect consumer loans purchased through
automobile dealers, however, has not been sufficient to replace normal payments
and payoffs and these balances have declined since year-end. The Corporation's
choice to not match what were considered low rates by competitors in certain
markets has resulted in the decreasing indirect loan portfolio. Credit card
outstandings were $36,104,000 at September 30, 1995, which represented an
increase of 4.4 percent from September 30, 1994 due to increased marketing
efforts, but were approximately $3.7 million less than at December 31, 1994,
which were seasonally high at that time.
Page 17 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOANS OUTSTANDING
- --------------------------------------------------------------------------------
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
Commercial and industrial loans $ 291,763 $ 275,865 $ 267,010
Agricultural production loans 50,600 42,093 43,053
Tax exempt loans 22,891 25,248 25,675
Real estate mortgage loans:
Commercial 297,488 304,199 297,212
Agricultural 39,569 36,593 35,508
Construction 70,016 68,957 58,124
Residential 878,633 828,667 779,389
Consumer loans 528,274 536,504 537,002
---------- ---------- ----------
Total loans $2,179,234 $2,118,126 $2,042,973
=============================================================================
The Corporation's loan portfolio contains no loans to foreign governments,
foreign enterprises, foreign operations of domestic companies, nor any
concentrations to borrowers engaged in the same or similar industries that
exceed 10 percent of total loans.
LOAN QUALITY
- ------------
The allowance for loan losses is maintained at a level considered adequate to
absorb potential loan losses based upon quarterly evaluations of the loan
portfolio by management and the boards of directors of the Corporation and each
subsidiary bank. These evaluations include consideration of past loan loss
experience, changes in the composition of the portfolio, the volume and
condition of loans outstanding, expected cash flows or the observable market
price of the loans or the fair value of the collateral for impaired loans, as
well as current economic conditions.
The allowance for loan losses was $28,446,000 at September 30, 1995,
representing 1.31 percent of total loans, compared with $27,440,000 at September
30, 1994, which represented 1.34 percent of total loans. At December 31, 1994,
the allowance for loan losses was $28,502,000 and represented 1.35 percent of
total loans. Annualized net charge-offs to average loans increased to .29
percent during the first three quarters of 1995 from .16 percent for the same
period of 1994, substantially as a result of increased credit card and consumer
loan charge-offs and write-downs at recently acquired banks which had previously
been fully provided for by pre-merger additions to reserves. The provision for
loan losses to average loans was .25 percent and .36 percent for the nine months
ending September 30, 1995, and 1994, respectively. The allowance for loan
losses to non-performing loans at September 30, 1995, and 1994, and at December
31, 1994, were 118.5 percent, 172.5 percent, and 178.4 percent, respectively.
Page 18 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
Beginning balance $ 28,502 $ 23,443
Allowance of subsidiaries at 600 1,118
acquisition date
Provision for loan losses 4,030 5,225
Loans charged-off (6,075) (3,692)
Recoveries 1,389 1,346
- --------------------------------------------------------------------------------
Ending balance $ 28,446 $ 27,440
================================================================================
- --------------------------------------------------------------------------------
Percent of total loans 1.31% 1.34%
================================================================================
Non-performing loans consist of loans past due 90 days or more but accruing,
loans classified as troubled debt restructurings and loans on nonaccrual status.
Although these loans have more than a normal risk of loss, they will not
necessarily result in a higher level of charge-offs in the future. As indicated
by the following table, the Corporation's non-performing loans as of September
30, 1995 totaled $23,999,000, an increase of $8,020,000 from December 31, 1994.
The non-performing loans to total loans ratio was 1.10 percent on September 30,
1995, as compared to .78 percent on September 30, 1994, and .75 percent on
December 31, 1994. Non-accrual commercial loans at the end of the current
period include a $4,500,000 loan where the borrower filed for protection under
Chapter 11 of bankruptcy laws during September 1995. Management is closely
monitoring this loan and the amount of loss cannot be determined at this time.
Non-accrual real estate mortgage loans include two loans with balances totaling
$5,400,000. Based on collateral value on these loans, the loss is not expected
to exceed $1,000,000. In addition to loans classified as non-performing, there
were other loans totaling $7,420,000, at September 30, 1995, where the borrowers
are experiencing difficulties and management is closely monitoring the
borrowers' abilities to comply with payment terms. However, conditions at this
time do not warrant classification as non-performing.
Page 19 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NON-PERFORMING LOANS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
Nonaccrual loans:
Commercial, agricultural, and
tax exempt $ 7,639 $ 3,945 $ 2,591
Real estate mortgage 9,758 6,053 6,541
Consumer 2,815 1,983 2,002
------- ------- -------
Total nonaccrual 20,212 11,981 11,134
Restructured loans:
Commercial, agricultural, and
tax exempt 368 892 1,272
Real estate mortgage 565 168 276
Consumer 5
------- ------- -------
Total restructured 933 1,065 1,548
90 days or more past due:
Commercial, agricultural, and
tax exempt 199 241 405
Real estate mortgage 1,475 1,488 1,822
Consumer 1,180 1,204 1,000
------- ------- -------
Total 90 days or more past due 2,854 2,933 3,227
------- ------- -------
Total non-performing loans $23,999 $15,979 $15,909
===============================================================================
- -------------------------------------------------------------------------------
Percent of total loans 1.10% .75% .78%
===============================================================================
DEPOSITS AND OTHER SOURCES OF FUNDS
- -----------------------------------
Total deposits were $2,788,898,000 at September 30, 1995, compared to
$2,643,697,000 and $2,595,456,000 at September 30, 1994, and December 31, 1994,
respectively. While non-interest bearing deposits decreased from September 30,
1994 by $872,000, interest bearing deposits were increased by $146.1 million.
Since December 31, 1994, non-interest bearing deposits, which were seasonally
high at year-end, declined by $12.2 million and interest bearing deposits
increased by $205.6 million. The mix of interest bearing deposits is moving from
liquid interest bearing transaction accounts to certificates of deposits and
other time deposits as customer preference has shifted in response to
competitive pricing on these longer-term deposit products.
Securities sold under repurchase agreements (repos) generally involve a
slightly lower cost of funds than do certificates of deposit and are offered by
the banks to their commercial customer base as a part of a corporate cash
management service and as an alternative to short-term certificates. Securities
sold under repurchase agreements were $309,786,000, $310,752,000, and
$319,965,000 at September 30, 1995, September 30, 1994, and December 31, 1994,
respectively. Much of the outstanding repurchase agreement balances were
acquired in the national money market and used to fund the increase in
residential mortgages and the purchase of mortgage-backed securities. These
repos are partially hedged by interest-rate caps as previously discussed.
Page 20 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DEPOSITS AND OTHER SOURCES OF FUNDS (CONINUED)
- -----------------------------------
Long-term debt totaled $153,954,000 at September 30, 1995 compared to
$74,559,000 at September 30, 1994 and $210,061,000 at December 31, 1994. The
$79.4 million increase in borrowings from one year ago is due to FHLB advances,
a significant funding source utilized by entities acquired by the Corporation
during 1995. As more cost-effective sources of funding became available, a
portion of these advances was repaid.
INVESTMENT SECURITIES
- ---------------------
Total investment securities available for sale and held to maturity
represented 34.7 percent of earning assets at September 30, 1995 compared to
33.6 percent and 32.8 percent at September 30, 1994 and December 31, 1994,
respectively. The portfolio has continued to shift toward investments in
mortgage-backed securities, predominately underwritten to the standards of, and
guaranteed by government sponsored agencies. These securities generally yield
70-100 basis points more than comparable U.S. Treasury securities. Mortgage-
backed securities differ from traditional debt securities in that they have
uncertain maturity dates and are priced based on estimated prepayment rates on
the underlying mortgages. Prepayment rates generally can be expected to
increase during periods of lower interest rates as the underlying mortgages are
refinanced at lower market rates. Conversely, the average lives of these
securities generally are extended as interest rates increase. The estimated
average life of these securities and the overall portfolio was 3.6 years and 3.9
years, respectively, at September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is a measure of the Corporation's ability to meet its customers'
present and future deposit withdrawals and increased loan demand without unduly
penalizing earnings. The Corporation manages its liquidity needs through a
coordinated asset/liability management program directed by the Funds Management
and Investment Committee.
Liquidity is provided by projecting credit demand and other financial needs
and then maintaining sufficient cash and assets readily convertible into cash or
available federal funds lines to meet these requirements. The Corporation has
provided for its liquidity needs through growth in core deposits, maturing loans
and investments in its securities portfolio, and by maintaining adequate
balances in other short-term securities and money market assets. At September
30, 1995, the Corporation had $144,228,000 in investment securities maturing
within one year. The Corporation additionally has federal funds lines and other
borrowing sources available to it and its banks. Investment securities maturing
within one year and unused borrowing sources was considered by management to
provide adequate liquidity in view of projected needs.
Total shareholders' equity at September 30, 1995, was $288,387,000, compared
to $273,828,000 at December 31, 1994. The Federal Reserve Board has established
a minimum leverage ratio of 3.0 percent for the most highly rated bank holding
companies that do not anticipate significant growth. All other institutions are
required to maintain a ratio of 4.0 to 5.0 percent depending on their particular
circumstances and risk profile. This ratio is defined as shareholders' equity
less intangible assets, as a
Page 21 of 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------
percentage of the sum of total assets less intangible assets, and is sometimes
referred to as tangible equity to tangible assets. The tangible equity to
tangible asset ratio at September 30, 1995, was 7.35 percent as compared to 7.60
percent at the end of 1994. The Federal Reserve Board has also adopted risk-
based capital guidelines which assign various risk weightings to assets and off-
balance sheet items and set minimum capital requirements. Banks are required to
have core capital (Tier 1) of at least 4.0 percent of risk weighted assets and
total capital of 8.0 percent of risk weighted assets. Tier 1 capital consists
primarily of shareholders' equity less goodwill; and total capital consists of
Tier 1 capital, certain long-term debt and convertible debentures and a portion
of the allowance for loan losses. Under the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991, institutions must have a leverage
ratio of 5.0 percent or above, Tier 1 capital to risk-based assets of 6.0
percent or above, and total capital to risk-based assets of 10.0 percent or
above in order to qualify as well capitalized. The Federal Reserve has proposed
regulations which would revise the current risk-based capital guidelines to
include a measurement of interest rate risk. The proposed change would not have
a material impact to the Corporation's capital ratios based on its interest rate
sensitivity position. At September 30, 1995, the Corporation's leverage, Tier 1
and total capital ratios were 7.35 percent, 11.59 percent, and 13.23 percent,
respectively, well above all regulatory minimums. Furthermore, each of the
Corporation's subsidiary banks has been rated as "well capitalized" by the
Federal Deposit Insurance Corporation. The Corporation is not aware of any
current recommendations by its regulatory authorities or any other known trends,
events, or uncertainties that will have or that are reasonably likely to have a
material effect on its liquidity, capital resources, or operations.
Page 22 of 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibits
--------
a. The following exhibit is submitted herewith:
11 - Statement regarding computation of per share earnings
Reports on Form 8-K
-------------------
b. A report on Form 8-K dated August 21, 1995, was filed regarding
the announcements of the completion of the merger of UF Bancorp,
Inc. with CNB Bancshares, Inc. and the completion of the merger of
The Bank of Orleans, Indiana, with CNB Bancshares, Inc. The report
also disclosed the completion of the acquisition of the Indiana
branches of Household Bank, f.s.b. a subsidiary of Household
International by CNB Bancshares, Inc.
- --------------------------------------------------------------------------------
No other information is required to be filed under Part II of the form.
Page 23 of 26
CNB BANCSHARES, INC.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Bancshares, Inc.
-----------------------------
(Registrant)
Date November 9, 1995 by /s/ H. Lee Cooper
------------------ -----------------------------
H. Lee Cooper, Chairman of the
Board and Chief Executive Officer
Date November 9, 1995 by /s/ Ralph L. Alley
------------------ -----------------------------
Ralph L. Alley, Senior Vice
President and Controller, Treasurer
(Principal Accounting
Officer)
Page 24 of 26
EXHIBIT INDEX
Reg. S-K
Exhibit No. Description of Exhibit Page
- ----------- ----------------------
11 Statement regarding computation of
per share earnings 26
Page 25 of 26
Exhibit 11
CNB BANCSHARES, INC.
Computation of Consolidated Net Income Per Share
(In thousands, except for per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Primary:
Net income $10,036 $ 8,570 $26,281 $23,917
------- ------- ------- -------
Weighted average number of shares outstanding 17,889 17,951 17,965 17,672
Add - common stock equivalents 259 370 303 370
------- ------- ------- -------
Weighted average number of shares outstanding, as adjusted 18,148 18,321 18,268 18,042
------- ------- ------- -------
Net income per share $ 0.55 $ 0.47 $ 1.44 $ 1.33
======= ======= ======= =======
Fully Diluted:
Net income $10,036 $ 8,570 $26,281 $23,917
Add - Interest and amortization of expenses
on 7.5% subordinated convertible debentures
due 2001, net of applicable taxes 77 88 231 275
------- ------- ------- -------
Net income, as adjusted 10,113 8,658 26,512 24,192
------- ------- ------- -------
Weighted average number of shares outstanding 17,889 17,951 17,965 17,672
Add - common stock equivalents 259 370 303 370
Add - shares issued assuming conversion of
7.5% subordinated debentures, due 2001 351 409 353 439
------- ------- ------- -------
Weighted average number of shares outstanding, as adjusted 18,499 18,730 18,621 18,481
------- ------- ------- -------
Net income per share $ 0.55(1) $ 0.46 $ 1.42(1) $ 1.31
======= ======= ======= =======
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
Page 26 of 26