UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) For the quarterly period ended September 30, 2001 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) For the transition period from ________ to ________ Commission File No. 0-25988 CNB Florida Bancshares, Inc. ---------------------------- (Exact Name of Registrant as Specified in Its Charter) FLORIDA 59-2958616 ------------------------------ ----------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 9715 Gate Parkway North Jacksonville, Florida 32246 ------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (904) 997-8484 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ The number of shares of the registrant's common stock outstanding as of October 31, 2001 was 6,082,377 shares, $0.01 par value per share. CNB FLORIDA BANCSHARES, INC. FINANCIAL REPORT ON FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Statement of Financial Condition.........................3 Consolidated Statement of Income......................................4 Consolidated Statement of Cash Flows..................................6 Notes to Consolidated Financial Statements............................7 Selected Financial Data...............................................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview.............................................................10 Results of Operations................................................10 Liquidity and Interest Rate Sensitivity..............................13 Earning Assets.......................................................16 Funding Sources......................................................20 Capital Resources....................................................20 Item 3. Quantitative and Qualitative Disclosure About Market Risk...21 PART II - OTHER INFORMATION Item 1. Legal Proceedings...........................................22 Item 2. Changes in Securities ......................................22 Item 3. Defaults Upon Senior Securities ............................22 Item 4. Submission of Matters to a Vote of Security Holders ........22 Item 5. Other Information ..........................................22 Item 6. Exhibits and Reports on Form 8-K ...........................22 2 PART I FINANCIAL INFORMATION CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited) September 30, December 31, 2001 2000 ------------- ------------ ASSETS (thousands) Cash and cash equivalents: Cash and due from banks $ 19,835 $ 20,769 Interest bearing deposits in other banks 554 129 ------- ------- Total cash and cash equivalents 20,389 20,898 Investment securities available for sale 33,230 33,236 Investment securities held to maturity 5,457 7,460 Loans: Commercial, financial and agricultural 266,233 192,540 Real estate - mortgage 158,626 120,663 Real estate - construction 43,404 33,648 Installment and consumer 40,623 33,970 ------- ------- Total loans, net of unearned income 508,886 380,821 Less: Allowance for loan losses (4,850) (3,670) ------- ------- Net loans 504,036 377,151 Premises and equipment, net 26,307 22,433 Intangible assets 6,671 1,034 Other assets 5,702 5,381 ------- ------- TOTAL ASSETS $ 601,792 $ 467,593 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 69,539 $ 52,082 Savings, NOW and money market 189,443 129,865 Time (under $100,000) 155,582 115,406 Time ($100,000 and over) 108,190 70,333 ------- ------- Total deposits 522,754 367,686 Securities sold under repurchase agreements and federal funds purchased 15,757 21,142 Short term borrowings 12,000 30,000 Other liabilities 5,039 4,129 ------- ------- Total liabilities 555,550 422,957 ------- ------- 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; 6,085,077 and 6,099,376 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively 61 61 Additional paid-in capital 30,456 30,581 Retained earnings 15,189 14,027 Accumulated other comprehensive income, net of tax 536 (33) ------- ------- Total shareholders' equity 46,242 44,636 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 601,792 $ 467,593 ======= ======= 3 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (Unaudited) Nine Months Ended September 30, 2001 2000 ------------ ------------ (thousands) Interest Income Interest and fees on loans $ 28,349 $ 20,610 Interest on investment securities available for sale 1,439 1,593 Interest on investment securities held to maturity 305 444 Interest on federal funds sold 94 177 Interest on interest bearing deposits 8 57 --------- --------- Total interest income 30,195 22,881 Interest Expense Interest on deposits 13,438 9,172 Interest on repurchase agreements and federal funds purchased 480 378 Interest on short-term borrowings 1,142 568 --------- --------- Total interest expense 15,060 10,118 --------- --------- Net interest income 15,135 12,763 Provision for Loan Losses 1,450 950 --------- --------- Net interest income after provision for loan losses 13,685 11,813 Non-interest Income Service charges 1,867 1,634 Secondary marketing mortgage loan sales 1,237 196 Other fees and charges 724 569 --------- --------- Total non-interest income 3,828 2,399 --------- --------- Non-interest Expense Salaries and employee benefits 7,507 6,337 Occupancy and equipment expenses 2,221 1,576 Other operating expenses 4,590 3,433 --------- --------- Total non-interest expense 14,318 11,346 --------- --------- Income before income taxes 3,195 2,866 Income taxes 1,118 990 --------- --------- NET INCOME $ 2,077 $ 1,876 ========= ========= Earnings Per Share (Note 3): Basic earnings per share $ 0.34 $ 0.31 ========= ========= Weighted average shares outstanding 6,096,582 6,099,278 ========= ========= Diluted earnings per share $ 0.33 $ 0.31 ========= ========= Diluted weighted average shares outstanding 6,212,878 6,141,743 ========= ========= 4 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three Months Ended September 30, 2001 2000 ------------ ------------ (thousands) Interest Income Interest and fees on loans $ 9,902 $ 7,568 Interest on investment securities available for sale 460 532 Interest on investment securities held to maturity 90 147 Interest on federal funds sold 66 17 Interest on interest bearing deposits 6 17 --------- --------- Total interest income 10,524 8,281 Interest Expense Interest on deposits 4,795 3,336 Interest on repurchase agreements and federal funds purchased 121 188 Interest on short-term borrowings 276 399 --------- --------- Total interest expense 5,192 3,923 --------- --------- Net interest income 5,332 4,358 Provision for Loan Losses 550 350 --------- --------- Net interest income after provision for loan losses 4,782 4,008 Non-interest Income Service charges 649 575 Secondary market mortgage loan sales 491 110 Other fees and charges 232 163 --------- --------- Total non-interest income 1,372 848 --------- --------- Non-interest Expense Salaries and employee benefits 2,530 2,178 Occupancy and equipment expenses 825 558 Other operating expenses 1,842 1,155 --------- --------- Total non-interest expense 5,197 3,891 --------- --------- Income before income taxes 957 965 Income taxes 333 333 --------- --------- NET INCOME $ 624 $ 632 ========= ========= Earnings Per Share (Note 3): Basic earnings per share $ 0.10 $ 0.10 ========= ========= Weighted average shares outstanding 6,097,248 6,088,137 ========= ========= Diluted earnings per share $ 0.10 $ 0.10 ========= ========= Diluted weighted average shares outstanding 6,210,072 6,125,459 ========= ========= 5 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2001 2000 ------------ ------------ (thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,077 $ 1,876 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,408 832 Provision for loan loss 1,450 950 Investment securities (accretion) amortization, net (5) 14 Non-cash compensation 17 44 Changes in assets and liabilities: Other assets (664) (610) Other liabilities 910 667 --------- --------- Net cash provided by operating activities 5,193 3,773 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities available for sale (30,876) (858) Proceeds from maturities of securities available for sale 21,798 3,214 Proceeds from maturities of securities held to maturity 3 562 Proceeds from called securities available for sale 10,000 489 Proceeds from called securities held to maturity 1,998 815 Net increase in loans (116,099) (80,569) Purchases of premises and equipment, net (3,065) (7,998) Branches acquired from Republic Bank 42,279 - --------- --------- Net cash used in investing activities (73,962) (84,345) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits 92,702 51,294 Decrease in securities sold under repurchase agreements and federal funds purchased (5,385) (465) Decrease in short term borrowings (18,000) 35,000 Cash dividends paid (915) (917) Repurchase of common stock (152) (395) Exercise of options 10 89 --------- --------- Net cash provided by financing activities 68,260 84,606 --------- --------- Increase (decrease) in cash and cash equivalents (509) 4,034 Cash and cash equivalents at beginning of period 20,898 17,520 --------- --------- Cash and cash equivalents at end of period $ 20,389 $ 21,554 ========= ========= SUPPLEMENTAL DISCLOSURES: Interest paid $ 14,041 $ 9,329 ========= ========= Taxes paid $ 1,479 $ 1,299 ========= ========= 6 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q which do not require all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, such financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. Operating results for the three and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Management's discussion and analysis should be read in conjunction with the consolidated financial statements. Note 2. Consolidation The consolidated financial statements include the accounts of CNB Florida Bancshares, Inc. and its wholly owned subsidiary, CNB National Bank. All significant intercompany accounts and transactions have been eliminated. Note 3. Earnings Per Share Basic earnings per share is calculated based on the weighted average number of shares of common stock outstanding during the period. 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 and restricted stock outstanding during the periods ended September 30, 2001 and 2000. Note 4. Branch Acquisitions On May 11, 2001, the Bank purchased the Lake City and Live Oak branches of Republic Bank. The Bank acquired loans and deposits of approximately $12 million and $64 million, respectively. The Bank also recorded a core deposit intangible of $6 million, which is being amortized over its estimated life of 10 years. Note 5. Comprehensive Income Comprehensive income is defined as the total of net income and all other changes in equity. The following table details the Company's comprehensive income for the three and nine month periods ending September 30, 2001 and 2000. Three Months Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 -------- -------- -------- -------- Net Income $ 624 $ 632 $ 2,077 $ 1,876 Other Comprehensive Income (Loss), Net of Tax Unrealized Gains (Losses) on Securities: Unrealized Gains (Losses) on Securities Arising During the Period 151 246 566 279 Less: Reclassification Adjustment - (2) (3) 9 ---- ---- ----- ----- Total Unrealized Gains (Losses), Net of Tax Recognized in Other Comprehensive Income 151 248 569 270 ---- ---- ----- ----- Comprehensive Income, Net of Tax $ 775 $ 880 $ 2,646 $ 2,146 ==== ==== ===== ===== 7 Note 6. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"). SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company will apply the provisions of SFAS 141 to future acquisitions. In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangibles ("SFAS 142"). SFAS 142 requires, among other things, the discontinuance of goodwill amortization and includes provisions for reassessment of the useful lives of existing intangibles and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a two-step transitional goodwill impairment test. The first step of the impairment test must be completed six months from the date of adoption and the second step must be completed as soon as possible, but no later than the end of the year of initial application. The Company will be adopting the provisions of SFAS 142 on January 1, 2002. Therefore, the Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. For the nine months ended September 30, 2001, the Company recorded goodwill amortization expense of $52,000. In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 expresses the SEC staff's views on the development, documentation and application of a systematic methodology in determining a GAAP allowance for loan losses. The SAB stresses that the methodology for computing the allowance be both disciplined and consistent, and emphasizes that the documentation supporting the allowance and provision must be sufficient. SAB No. 102 provides guidance that is consistent with the Federal Financial Institutions Examination Council's ("FFIEC"), Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions, which was also issued in July 2001. SAB No. 102 is applicable to all registrants with material loan portfolios while the parallel guidance of the FFIEC is applicable only to banks and savings institutions. The adoption of this bulletin did not have a material impact on reported results of operations of the Company. Note 7. Subsequent Event On October 1, 2001, the Company modified its existing line of credit agreement with a bank. The existing $10 million line of credit was modified through the following structures: o $3 million revolving line of credit maturing on June 30, 2002. Interest is variable at 3-month Libor plus 145 basis points. o $10 million term loan maturing October 3, 2006. Interest is variable at 3-month Libor plus 170 basis points. Quarterly principal payments begin in 2003 based on a 7-year amortization schedule. In addition, the Company entered into a $10 million pay-fixed interest rate swap with the same bank. The fixed rate under the interest rate swap is 6.45% and the variable rate is based on 3-month Libor plus 170 basis points. The swap matures October 3, 2006 and has been designated as a cash flow hedge of the variable interest payments on the $10 million term loan noted above. 8 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY Selected Financial Data Nine Months Ended September 30, 2001 2000 ------------ ------------- Dollars in thousands except per share information. ----------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS: Total interest income $ 30,195 $ 22,881 Total interest expense (15,060) (10,118) ----------- ----------- Net interest income 15,135 12,763 Provision for loan losses (1,450) (950) ------------ ------------ Net interest income after provision for loan losses 13,685 11,813 Non-interest income 3,828 2,399 Non-interest expense (14,318) (11,346) ----------- ----------- Income before taxes 3,195 2,866 Income taxes (1,118) (990) ----------- ----------- Net income $ 2,077 $ 1,876 ============ =========== ----------------------------------------------------------------------------------------------------- PER COMMON SHARE: Basic earnings $ 0.34 $ 0.31 Diluted earnings 0.33 0.31 Book value 7.61 7.23 Dividends 0.15 0.15 Actual shares outstanding 6,085,077 6,091,300 Weighted average shares outstanding 6,096,582 6,099,278 Diluted weighted average shares outstanding 6,212,878 6,141,743 ----------------------------------------------------------------------------------------------------- KEY RATIOS: Return on average assets 0.52% 0.65% Return on average shareholders' equity 6.10 5.77 Dividend payout 44.11 48.39 Efficiency ratio 75.50 74.83 Total risk-based capital ratio 8.94 13.51 Average shareholders' equity to average assets 8.47 11.18 Tier 1 leverage 6.66 10.48 ----------------------------------------------------------------------------------------------------- FINANCIAL CONDITION AT PERIOD-END: Assets $ 601,792 $ 433,540 Loans 508,886 346,457 Deposits 522,754 339,497 Shareholders' equity 46,242 44,042 ----------------------------------------------------------------------------------------------------- 9 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 Florida Bancshares, Inc. for the nine months ended September 30, 2001 and 2000. This financial information should be read in conjunction with the unaudited consolidated financial statements of CNB Florida Bancshares, Inc. ("the Company") and its wholly owned subsidiary, CNB National Bank ("the Bank"), included in "Item 1. Financial Statements" above and the audited consolidated financial statements included in Form 10-K for the year ended December 31, 2000. The analysis contains forward-looking statements with respect to financial and business matters, which are subject to risks and uncertainties, that may change over a period of time. These risks and uncertainties include but are not limited to changes in interest rates, variances in actual versus projected growth in assets, loan losses, the ability to control expenses, costs of opening new branches and entering the First Coast and Gainesville markets, competitive factors and general economic conditions, changes in government regulation, the ability to attract and retain qualified personnel and the ability to attract new loan and deposit relationships. Actual results could be significantly different from the forward-looking statements contained herein. The Company has no foreign operations; accordingly, there are no assets or liabilities attributable to foreign operations. RESULTS OF OPERATIONS The Company's net income for the nine month period ended September 30, 2001 was $2.1 million, or $0.33 per diluted share, compared to $1.9 million, or $0.31 per diluted share, for the nine month period in 2000. Net income for the three month period ended September 30, 2001 was $624,000, or $0.10 per diluted share, compared to $632,000, or $0.10 per diluted share, for the comparable period in 2000. Total assets increased to $601.8 million at September 30, 2001 compared to $433.5 million at September 30, 2000, an increase of 39%. Included in the results for a portion of the first nine months of 2001 is the impact of the acquisition of the Lake City and Live Oak branches of Republic Bank in May 2001. In connection with the purchase, the Company acquired loans and deposits of approximately $12 million and $64 million, respectively. Net Interest Income Net interest income is the single largest source of revenue for the Bank and consists of interest and fee income generated by earning assets, less interest expense paid on interest bearing liabilities. Net interest income was $15.1 million for the nine month period ending September 30, 2001, compared to $12.8 million for the comparable period in 2000, an increase of 19%. Interest income for the three and nine month periods ended September 30, 2001, increased $2.2 million, or 27%, and $7.3 million, or 32%, respectively, over the comparable prior year periods. Loan growth was the primary contributor to the increase in interest income. Interest expense rose $1.3 million, or 32% and $4.9 million, or 49% for the three and nine months ending September 30, 2001, respectively, from the comparable 2000 periods. The increased interest expense reflects deposit growth, including those accounts acquired from Republic Bank, and partially mitigated the positive impact of loan growth on net interest income. Average loans increased $144.6 million or 48% and represented 91% of total average earning assets for the nine months ended September 30, 2001 versus 86% for 2000. The Company's loan to deposit ratio at September 30, 2001 was 97% compared to 104% at December 31, 2000. The Company's net interest margin decreased to 4.13% in 2001, compared to 4.85% in 2000. The decline in the margin is reflective of a drop in interest rates of 400 basis points during the first nine months of 2001 coupled with an increase in average time deposit rates. Table 1: "Average Balances - Yields and Rates" provides the Company's average volume of interest earning assets and interest bearing liabilities for the nine months ended September 30, 2001 and 2000. Table 1a presents an analysis of changes in interest income and expense. 10 Table 1: Average Balances - Yields and Rates (Unaudited) Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 ------------------------------------- ----------------------------------- Interest Interest Average Income or Average Average Income or Average Balance Expense Rate Balance Expense Rate --------- ----------- ---------- --------- ---------- ---------- ASSETS: (dollars in thousands) Federal funds sold $ 3,178 $ 94 3.96% $ 3,951 $ 177 5.98% Investment securities available for sale 32,248 1,439 5.97 33,522 1,593 6.35 Investment securities held to maturity 6,659 305 6.12 10,212 444 5.81 Loans (1) 447,375 28,349 8.47 302,824 20,610 9.09 Interest bearing deposits 346 8 3.09 1,148 57 6.63 ------- --------- ---- ------- ------- ---- TOTAL EARNING ASSETS 489,806 30,195 8.24 351,657 22,881 8.69 All other assets 47,910 36,749 ------- ------- TOTAL ASSETS $ 537,716 $ 388,406 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY: NOW and money markets $ 140,193 $ 3,018 2.88% $ 108,650 $ 2,698 3.32% Savings 18,218 158 1.16 17,346 180 1.39 Time deposits 224,638 10,262 6.11 146,272 6,294 5.75 Repurchase agreements and federal funds purchased 14,725 480 4.36 8,830 378 5.72 Short term borrowings 27,344 1,142 5.58 11,277 568 6.73 ------- --------- ---- ------- ------- ---- TOTAL INTEREST BEARING LIABILITIES 425,118 15,060 4.74 292,375 10,118 4.62 Demand deposits 60,654 48,759 Other liabilities 6,400 3,841 Shareholders' equity 45,544 43,431 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 537,716 $ 388,406 ======= ======= INTEREST SPREAD (2) 3.50% 4.07% ==== ==== --------- ------- NET INTEREST INCOME $ 15,135 $ 12,763 ========= ======= NET INTEREST MARGIN (3) 4.13% 4.85% ===== ====(1) Interest income on average loans includes loan fee recognition of $804,000 and $644,000 in 2001 and 2000, respectively. (2) Represents the average rate earned minus average rate paid. (3) Represents net interest income divided by total earning assets. 11 Table 1a: Analysis of Changes in Interest Income and Expense (Unaudited) NET CHANGE SEPTEMBER 30, NET CHANGE SEPTEMBER 30, 2000-2001 ATTRIBUTABLE TO: 1999-2000 ATTRIBUTABLE TO: -------------------------- -------------------------- Net Net Volume (1) Rate (2) Change Volume (1) Rate (2) Change ---------- -------- ------ ---------- -------- ------ (thousands) INTEREST INCOME: Federal funds sold $ (35) $ (48) $ (83) $ (389) $ 36 $ (353) Investment securities available for sale (62) (92) (154) (630) 123 (507) Investment securities held to maturity (155) 16 (139) 65 25 90 Loans 9,810 (2,071) 7,739 6,409 245 6,654 Interest bearing deposits (40) (9) ( 49) (366) 15 (351) ------ ------- ------ ------- ------- ------- Total 9,518 (2,204) 7,314 5,089 444 5,533 ------ ------- ------ ------- ------- ------- INTEREST EXPENSE: NOW and money markets 781 (461) 320 475 1,011 1,486 Savings 8 (30) (22) (1) (4) (5) Time deposits 3,363 605 3,968 580 685 1,265 Repurchase agreements and federal funds purchased 192 (90) 102 103 61 164 Short term borrowings 811 (237) 574 - 568 568 ------ ------- -------- ------- ------- ------- Total 5,155 (213) 4,942 1,157 2,321 3,478 ------ ------- ------- ------- ------- ------- Net interest income $ 4,363 $ (1,991) $ 2,372 $ 3,932 $ (1,877) $ 2,055 ====== ======= ======= ======= ======= =======(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 for the nine months ended September 30, 2001 was $3.8 million, an increase of $1.4 million, or 60% as compared to the same period in 2000. For the three months ended September 30, 2001, non-interest income increased $524,000 or 62% to $1.4 million as compared to $848,000 for the same period in 2000. Service charges on deposit accounts increased to $233,000 for the nine month period and $74,000 for the three month period ending September 30, 2001 as compared to the same periods in 2000. Other fee income, which includes credit card fees, credit life insurance income, safe deposit box fees, fees from mortgage loans sold to secondary markets, net gains and losses from sale of securities and other miscellaneous fees, increased $450,000 in the third quarter of 2001 compared to the third quarter of 2000 and increased $1.2 million for the first nine months of 2001 versus the comparable period in 2000. The increase in other fee income was primarily attributed to growth in mortgage loan originations sold to secondary loan markets and higher service charge income. Non-interest income, annualized, as a percentage of average assets was 0.95% for the nine months ended September 30, 2001, compared to 0.83% for the comparable period in 2000. Non-Interest Expense Non-interest expense increased in the third quarter of 2001 compared to the same period in 2000 by $1.3 million or 34%, and $3.0 million, or 26% for the 2001 nine month period versus the comparable period in 2000. Non-interest expense, annualized, as a percentage of average assets for the nine month period ending September 30, 2001 and 2000 was 3.56% and 3.90%, respectively. 12 Salaries and employee benefits increased $1.2 million or 18% to $7.5 million for the 2001 nine month period, compared to $6.3 million for the same period in 2000. This increase reflects the opening of two new branches in our First Coast market, in addition to the purchase of the Lake City and Live Oak branches of Republic Bank. Occupancy expense, including premises, furniture, fixtures and equipment, increased $267,000, or 48% and $645,000, or 41%, respectively in 2001, over the comparable three and nine month periods in 2000. The increase is primarily attributable to the increased costs resulting from branch openings in Jacksonville and St. Augustine, the relocation during 2000 into new facilities in Jacksonville and Gainesville and the expansion of our Lake City Operations Center. The Bank also acquired two branches from Republic Bank in May 2001 and, in connection with that transaction, closed an existing branch in Live Oak. Other operating expenses increased $1.2 million, or 34%, for the first nine months of 2001 compared to the same period in 2000. The following table details the areas of significance in other operating expenses. Table 2: Other Operating Expenses Nine Months Ended September 30, 2001 2000 ---------- ---------- (thousands) Data processing $ 810 $ 486 Advertising and promotion 437 474 Telephone 430 436 Postage and delivery 495 405 Legal and professional 324 335 Supplies 427 304 Amortization of intangible assets 339 135 Loan expenses 191 127 Regulatory fees 167 110 Administrative 155 141 Insurance and bonding 80 60 Education expense 78 32 Dues and subscriptions 66 51 Directors fees 56 60 Other general operating 50 90 Other 485 187 ------ ------ Total other operating expenses $4,590 $3,433 ====== ====== Income Taxes The Company's income tax expense in interim reporting periods is determined by estimating the combined federal and state effective tax rate for the year and applying such rate to interim pre-tax income. The Company's estimated effective tax rate for the corresponding quarter and current year is approximately 35%. LIQUIDITY AND INTEREST RATE SENSITIVITY 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 investment securities available for sale) totaled $55.1 million and represented 12% of average total deposits during the nine months of 2001, compared to $54.8 million and 17% for 2000. Average loans were 101% and 94% of average deposits for the nine month period ended September 30, 2001 and 2000, respectively. 13 In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities such as the collection of interest and fees, federal funds sold, loan and investment maturities and lines for the purchase of federal funds by the Company from its principal correspondent banks. In addition, the Company has a 364-day $10 million line of credit with one of its correspondent banks, which was modified subsequent to September 30, 2001 (see Note 7). The Company is also a member of the FHLB and has access to short-term and long- term funds. Outstanding borrowings at September 30, 2001 and 2000 with the FHLB and other financial institutions were $12.0 million and $3.1 million, respectively. Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. 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 risk to the Company. The Company's gap and liquidity positions are reviewed on a regular basis 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 of changes in interest rates on net interest income. In Table 3, "Rate Sensitivity Analysis", rate sensitive assets and liabilities are shown, separating fixed and variable interest rates. The estimated fair value of each instrument category is also shown in the table. While these fair values are based on management's judgment of the most appropriate factors, there is no assurance that, were the Company to have disposed of such instruments at September 30, 2001, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. 14 Table 3: Rate Sensitivity Analysis September 30, 2001 (dollars in thousands) Fair 1 Year 2 Years 3 Years 4 Years 5 Years Beyond TOTAL Value ------ ------- ------- ------- ------- ------ ----- ----- INTEREST-EARNING ASSETS: Investment securities (1) Fixed rate investments $ 4,541 $ - $ 18,137 $ 4,100 $ 5,457 $ 684 $ 32,919 $ 33,638 Average interest rate 3.81% 5.63% 5.36% 6.15% 5.39% 5.43% Variable rate investments - - - - - 1,071 1,071 1,086 Average interest rate 6.40% 6.40% Loans Fixed rate loans 57,265 34,882 35,835 31,405 30,614 66,963 256,964 253,536 Average interest rate 8.53% 8.85% 8.69% 8.79% 8.56% 7.92% 8.47% Variable rate loans 76,521 28,368 25,005 16,966 13,850 91,212 251,922 251,922 Average interest rate 6.67% 6.43% 6.81% 6.94% 6.85% 7.80% 7.09% Other earning assets (2) 4,395 - - - - - 4,395 4,517 Average interest rate 5.84% 5.84% ------- ------ ------ ------ ------ ------- ------- ------- Total interest-earning assets $ 142,722 $ 63,250 $ 78,977 $ 52,471 $ 49,921 $ 159,930 $ 547,271 $ 544,699 Average interest rate 7.30% 7.76% 7.39% 7.92% 7.82% 7.83% 7.63% ======= ====== ====== ====== ====== ======= ======= ======= INTEREST-BEARING LIABILITIES: Savings $ - $ - $ - $ - $ - $ 19,836 $ 19,836 $ 19,836 Average interest rate 1.00% 1.00% NOW 35,488 - - - - 67,342 102,830 102,830 Average interest rate 3.24% 0.76% 1.62% Money market (3) 62,565 - - - - 4,212 66,777 66,777 Average interest rate 3.82% 2.00% 3.71% CD's under $100,000 135,858 11,692 3,667 4,365 - - 155,582 154,490 Average interest rate 5.21% 5.21% 4.91% 4.84% 5.19% CD's $100,000 and over 97,524 6,657 1,938 1,955 116 - 108,190 107,418 Average interest rate 5.60% 5.61% 4.80% 4.74% 6.55% 5.57% Securities sold under repurchase agreements and federal funds purchased 15,757 - - - - - 15,757 15,757 Average interest rate 2.37% 2.37% Short term borrowings 12,000 - - - - - 12,000 12,000 Average interest rate 4.02% 4.02% -------- ------- ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities $ 359,192 $ 18,349 $ 5,605 $ 6,320 $ 116 $ 91,390 $ 480,972 $ 479,108 Average interest rate 4.71% 5.36% 4.87% 4.81% 6.55% 0.87% 4.01% ======= ======= ======= ======= ======= ======= ======= =======(1) Securities available for sale are shown at their amortized cost, excluding market value adjustment for unrealized gains of $856,000. (2) Represents interest bearing deposits with other banks, Federal Reserve Bank Stock, Federal Home Loan Bank Stock and other marketable equity securities. (3) All Money Market accounts $25,000 and over and 30% of Money Market accounts under $25,000 have been designated as maturing within one year. 15 Core deposits, which represent all deposits other than time deposits in excess of $100,000, were 79% of total deposits at September 30, 2001 and 81% at December 31, 2000. The Bank closely monitors its reliance on time deposits in excess of $100,000, which are generally considered less stable and less reliable than core deposits. Table 4, below, sets forth the amounts of time deposits with balances of $100,000 or more that mature within indicated periods. The Bank does not nor has it ever solicited brokered deposits. Table 4: Maturity of Time Deposits of $100,000 or More September 30, 2001 (dollars in thousands) Amount Three months or less $ 28,416 Three through six months 28,340 Six through twelve months 40,768 Over twelve months 10,666 ------- Total $108,190 ======= EARNING ASSETS Loans During the nine month period ending September 30, 2001, average loans were $447.4 million and were 101% of average deposits, compared to $302.8 million and 94% for 2000. Total loans have increased by $128.1 million, or 34%, since December 31, 2000. Loan growth has occurred in all of the portfolios, with the most significant increase in commercial, financial and agricultural loans and real estate- mortgage loans. Average loans as a percent of average earning assets increased to 91% for the nine months ending September 30, 2001, compared to 86% for the comparable period in 2000. The following table reflects the composition of the Company's loan portfolio as of September 30, 2001 compared to December 31, 2000. Table 5: Loan Portfolio Composition September 30, December 31, 2001 2000 -------------- -------------- (thousands) Commercial, financial and agricultural $ 266,233 $ 192,540 Real estate - mortgage 158,626 120,663 Real estate - construction 43,404 33,648 Installment and consumer 40,623 33,970 ------- ------- Total loans, net of unearned income 508,886 380,821 Less: allowance for loan losses (4,850) (3,670) ------- ------- Net loans $ 504,036 $ 377,151 ======= ======= Loan Quality 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 in the loan portfolio. The allowance for loan losses is established through a provision charged to expense. In determining the adequacy of the reserve for loan losses, management considers those levels maintained by other peer banks, conditions of the individual borrowers, the Company's historical loan loss experience and the general economic environment, as well as 16 the overall portfolio composition. Loans are charged against the allowance when it is recognized that collection of the principal is unlikely. The allowance for loan losses on September 30, 2001 was 0.95% of total loans, compared to 0.96% on December 31, 2000. Table 6: "Allocation of Allowance for Loan Losses", set forth below, indicates the specific reserves allocated by loan type. Table 6: Allocation of Allowance for Loan Losses September 30, December, 31 2001 2000 ------------------------- ----------------------- Percent of Percent of Loans in Each Loans in Each Category to Category to Amount Total Loans Amount Total Loans -------- ------------- -------- ------------- (dollars in thousands) Commercial, financial and agricultural $ 3,297 52% $ 2,607 50% Real estate - mortgage 421 31% 293 32% Real estate - construction 22 9% 15 9% Consumer 948 8% 734 9% Unallocated 162 - 21 - ----- ---- ------ ---- Total $ 4,850 100% $ 3,670 100% ===== ==== ====== ==== Total non-performing assets increased by $708,000 or 48% to $2.2 million on September 30, 2001, compared to $1.5 million on December 31, 2000. Non-performing assets as a percentage of total assets increased to 0.36% on September 30, 2001 from 0.32% on December 31, 2000. Non-accrual loans have increased $1.2 million since December 31, 2000. This increase is primarily due to four commercial real estate loans filing bankruptcy or going to foreclosure. Table 7: Non-Performing Assets September 30, December 31, 2001 2000 ---------- ---------- (dollars in thousands) Non-accrual loans $ 1,781 $ 579 Past due loans 90 days or more and still accruing 241 840 Other real estate owned and repossessions 161 56 ------ ------- Total non-performing assets $ 2,183 $ 1,475 ====== ====== Percent of total assets 0.36% 0.32% 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 inherent losses in the loan portfolio; however, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove to be valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. Table 8: "Activity in Allowance for Loan Losses", below, indicates activity in the allowance for loan losses for the nine month period ending September 30, 2001 and 2000. 17 Table 8: Activity in Allowance for Loan Losses September 30, 2001 2000 --------- --------- (dollars in thousands) Balance at beginning of year $ 3,670 $ 2,671 Allowance acquired by acquisition 110 - Loans charged-off: Commercial, financial and agricultural 272 64 Real estate, mortgage 46 40 Real estate, construction - - Consumer 288 239 ------ ------ Total loans charged-off (606) (343) Recoveries on loans previously charged-off: Commercial, financial and agricultural 107 25 Real estate, mortgage 21 - Real estate, construction - - Consumer 98 122 ------ ------ Total loan recoveries 226 147 ------ ------ Net loans charged-off (380) (196) ------ ------ Provision for loan losses charged to expense 1,450 950 ------ ------ Ending balance $ 4,850 $ 3,425 ====== ====== Total loans outstanding $ 508,886 $ 346,457 Average loans outstanding $ 447,375 $ 302,824 Allowance for loan losses to loans outstanding 0.95% 0.99% Net charge-offs to average loans outstanding, annualized 0.11% 0.09% 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 total recorded value of securities was $38.7 million at September 30, 2001, a decrease of 5% from $40.7 million at the end of 2000. Securities are classified as either held-to-maturity or available-for-sale which are recorded at amortized cost and fair market value, respectively. Securities available-for-sale, which made up 86% of the total investment portfolio as of September 30, 2001 had a value of $33.2 million. Securities in the available-for-sale portfolio are recorded at fair value on the balance sheet and unrealized gains and losses associated with these securities are recorded, net of tax, as a separate component of shareholders' equity. At September 30, 2001, shareholders' equity recorded a net unrealized gain of $536,000, compared to a $33,000 net unrealized loss at December 31, 2000. The Company invests primarily in direct obligations of the United States, obligations guaranteed as to the principal and interest by the United States and obligations of agencies of the United States. In addition, the Company enters into federal funds transactions with its principal correspondent banks. The Federal Reserve Bank and Federal Home Loan Bank also require equity investments to be maintained by the Company. The following tables set forth the maturity distribution and the weighted average yields of the Company's investment portfolio. 18 Table 9: Maturity Distribution of Investment Securities (1) September 30, 2001 (dollars in thousands) Held to Maturity Available for Sale ------------------------------------------------------------------------------------------------------------------- Amortized Estimated Amortized Estimated Cost Market Value Cost Market Value U.S. Treasury: One year or less $ - $ - $ 1,500 $ 1,500 ----------- ----------- ------- ------- Total U.S. Treasury - - 1,500 1,500 U.S. Government Agencies and Corporations: One year or less - - 2,951 2,942 Over one through five years 5,457 5,454 22,000 22,683 ---------- ---------- ------- ------- Total U.S. Government Agencies 5,457 5,454 24,951 25,625 and Corporations Obligations of State and Political Subdivisions: One year or less - - 90 91 Over one through five years - - 237 242 Over ten years - - 608 648 ---------- ---------- ------- --------- Total Obligations of State and - - 935 981 Political Subdivisions Mortgage-Backed Securities (2): Over five through ten years - - 230 233 Over ten years - - 917 931 ---------- ---------- ------- ------- Total Mortgage-Backed Securities - - 1,147 1,164 Other Securities: Over ten years (3) - - 3,840 3,960 ---------- ---------- ------- ------- Total Other Securities - - 3,840 3,960 Total Securities $ 5,457 $ 5,454 $ 32,373 $ 33,230 ========== ========== ======= =======(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. Table 10: Weighted Average Yield by Range of Maturities September 30, 2001 December 31, 2000 September 30, 2000 ------------------ ----------------- ------------------ One Year or Less 2.56% 6.49% 6.24% Over One through Five Years 5.39% 6.00% 6.00% Over Five through Ten Years 6.06% 6.18% 6.18% Over Ten Years (1) 6.34% 6.45% 6.36%(1) Represents adjustable rate mortgage-backed securities which are repriceable within one year. 19 Other Earning Assets Temporary investment needs are created in the day-to-day liquidity movement of the Bank and are satisfied by selling excess funds overnight (Fed Funds Sold) to larger, well capitalized banking institutions. If these funds become excessive, management determines what portion, if any, of the liquidity may be rolled into longer term investments as securities. FUNDING SOURCES Deposits The Bank does not rely on purchased or brokered deposits as a source of funds. Instead, competing for deposits within its market area serves as the Bank's fundamental tool in providing a source of funds to be invested primarily in loans. The following table sets forth certain deposit categories for the periods ended September 30, 2001 and December 31, 2000. Table 11: Total Deposits September 30, December 31, 2001 2000 ----------- ------------ (thousands) Non-interest bearing: Demand checking $ 69,539 $ 52,082 Interest bearing: NOW checking 102,830 74,589 Money market checking 66,777 38,797 Savings 19,836 16,479 Certificates of deposit 263,772 185,739 -------- -------- Total deposits $ 522,754 $ 367,686 ======== ======== CAPITAL RESOURCES Shareholders' equity at September 30, 2001 was $46.2 million, as compared to $44.6 million at December 31, 2000. At September 30, 2001, the Company's common stock had a book value of $7.61 per share compared to $7.32 per share at December 31, 2000. The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgements by the regulators about component risk weightings and other factors. Quantitative measures as defined by regulation and established to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. 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." As of September 30, 2001, the Bank met all capital adequacy requirements to which it is subject. Selected capital ratios at September 30, 2001 compared to September 31, 2000 and regulatory requirements are as follows: 20 Table 12: Capital Ratios September 30, September 30, Well Capitalized Regulatory 2001 2000 Requirements Minimums ------------ ------------ ------------ -------- Risk Based Capital Ratios: Tier 1 Capital Ratio Consolidated 8.0% 12.5% 6.0% 4.0% Bank 9.3% 9.9% 6.0% 4.0% Total Capital to Risk-Weighted Assets Consolidated 8.9% 13.5% 10.0% 8.0% Bank 10.3% 10.9% 10.0% 8.0% Tier 1 Leverage Ratio Consolidated 6.7% 10.5% 5.0% 4.0% Bank 7.8% 8.5% 5.0% 4.0% QUANTITATIVE AND QUALITATIVE 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 were held by the Company at September 30, 2001 (the Company entered into an interest rate swap on October 3, 2001, as more fully described in Note 7 of Item 1.), but other financial instruments, which include investments, loans , deposit liabilities and borrowings are included in the Company's balance sheet. The release requires quantitative and qualitative disclosures about market risk. See section titled "Liquidity and Interest Rate Sensitivity" for further discussion on the Company's management of interest rate risk. Financial instruments that have market risk are included in Table 3: "Rate Sensitivity Analysis". These instruments are shown, 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 values 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 September 30, 2001, 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 September 30, 2001 would not necessarily be considered to apply at subsequent dates. 21 PART II OTHER INFORMATION Item 1. Legal Proceedings - There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. Item 2. Changes in Securities - Not applicable. Item 3. Defaults Upon Senior Securities - Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - Not applicable. Item 5. Other Information - Not applicable. Item 6. Exhibits and Reports on Form 8-K - (a) Exhibits: None. (b) Form 8-K: None. 22 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 Florida Bancshares, Inc. -------------------------------- (Registrant) By: /s/ G. Thomas Frankland -------------------------- G. Thomas Frankland Executive Vice President and Chief Financial Officer Date: November 9, 2001 23