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 June 30, 2003
----------------
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 July 31,
2003 was 6,220,490 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 Statements of Financial Condition ......................................................... 3
Consolidated Statements of Income ......................................................................4
Consolidated Statements of Cash Flows ...................................................................6
Notes to Consolidated Financial Statements ..............................................................7
Selected Financial Data ................................................................................11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview ...............................................................................................12
Results of Operations ..................................................................................12
Liquidity and Interest Rate Sensitivity.................................................................18
Earning Assets..........................................................................................21
Funding Sources ........................................................................................25
Capital Resources ......................................................................................25
Critical Accounting Policies............................................................................26
Item 3. Quantitative and Qualitative Disclosure About Market Risk .....................................26
Item 4. Controls and Procedures........................................................................27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................28
Item 2. Changes in Securities and Use of Proceeds......................................................28
Item 3. Defaults Upon Senior Securities ...............................................................28
Item 4. Submission of Matters to a Vote of Security Holders ...........................................28
Item 5. Other Information .............................................................................28
Item 6. Exhibits and Reports ..........................................................................28
PART I
FINANCIAL INFORMATION
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
ASSETS June 30, December 31,
2003 2002
---------- ------------
Cash and cash equivalents: (thousands)
Cash and due from banks $ 21,155 $ 15,986
Federal funds sold 17,900 5,400
Interest-bearing deposits in other banks 27,410 12,215
--------- ---------
Total cash and cash equivalents 66,465 33,601
Investment securities available for sale 65,088 49,682
Loans:
Commercial 104,778 111,033
Commercial real estate 341,088 324,525
Mortgages (including home equity) 144,367 132,513
Consumer 31,823 32,199
Credit card 1,060 1,164
Tax free 6,886 4,351
--------- ---------
Total loans, net of unearned income 630,002 605,785
Less: Allowance for loan losses (6,788) (6,574)
--------- ---------
Net loans 623,214 599,211
Loans held for sale 905 10,893
Premises and equipment, net 24,633 25,086
Intangible assets, net 5,693 6,056
Other assets 6,340 6,145
--------- ---------
TOTAL ASSETS $ 792,338 $ 730,674
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 101,022 $ 80,065
Savings, NOW and money market 265,458 236,284
Time under $100,000 177,537 172,671
Time $100,000 and over 167,971 159,616
--------- ---------
Total deposits 711,988 648,636
Securities sold under repurchase agreements and federal funds purchased 9,627 14,446
Other borrowings 11,000 11,000
Other liabilities 6,154 5,671
--------- ---------
Total liabilities 738,769 679,753
--------- ---------
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,
6,220,490 shares issued and outstanding at June 30, 2003 and
6,125,500 shares issued and outstanding at December 31, 2002 62 61
Additional paid-in capital 31,802 30,840
Retained earnings 21,829 19,912
Accumulated other comprehensive (loss) income, net of taxes (124) 108
--------- ---------
Total shareholders' equity 53,569 50,921
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 792,338 $ 730,674
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended
June 30,
2003 2002
---------- ----------
(thousands)
Interest Income
Interest and fees on loans $ 10,075 $ 9,648
Interest on investment securities available for sale 516 411
Interest on investment securities held to maturity -- 30
Interest on federal funds sold 31 29
Interest on interest-bearing deposits 123 4
---------- ----------
Total interest income 10,745 10,122
Interest Expense
Interest on deposits 3,784 3,512
Interest on repurchases and federal funds purchased 29 47
Interest on other borrowings 170 163
---------- ----------
Total interest expense 3,983 3,722
---------- ----------
Net interest income 6,762 6,400
Provision for Loan Losses 650 525
---------- ----------
Net interest income after provision for loan losses 6,112 5,875
Non-Interest Income
Service charges 912 822
Secondary market mortgage sales 383 521
Other fees and charges 192 153
Securities gains 382 4
---------- ----------
Total non-interest income 1,869 1,500
Non-Interest Expense
Salaries and employee benefits 2,696 2,783
Occupancy and equipment expense 880 834
Other operating expense 1,789 1,687
---------- ----------
Total non-interest expense 5,365 5,304
---------- ----------
Income before income taxes 2,616 2,071
Provision for income taxes 947 738
---------- ----------
NET INCOME $ 1,669 $ 1,333
========== ==========
Earnings Per Share (Note 3):
Basic earnings per common share $ 0.27 $ 0.22
========== ==========
Weighted average shares outstanding 6,206,429 6,095,953
========== ==========
Diluted earnings per common share $ 0.26 $ 0.21
========== ==========
Diluted weighted average shares outstanding 6,394,681 6,200,906
========== ==========
Dividends Per Share $ 0.06 $ 0.05
========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- ----------
(thousands)
Interest Income
Interest and fees on loans $ 20,150 $ 18,900
Interest on investment securities available for sale 977 847
Interest on investment securities held to maturity -- 71
Interest on federal funds sold 69 43
Interest on interest-bearing deposits 246 5
---------- ----------
Total interest income 21,442 19,866
Interest Expense
Interest on deposits 7,726 7,177
Interest on repurchases and federal funds purchased 56 108
Interest on other borrowings 338 324
---------- ----------
Total interest expense 8,120 7,609
---------- ----------
Net interest income 13,322 12,257
Provision for Loan Losses 1,325 1,025
---------- ----------
Net interest income after provision for loan losses 11,997 11,232
Non-Interest Income
Service charges 1,767 1,562
Secondary market mortgage sales 890 994
Other fees and charges 439 344
Securities gains 395 4
---------- ----------
Total non-interest income 3,491 2,904
Non-Interest Expense
Salaries and employee benefits 5,550 5,526
Occupancy and equipment expense 1,783 1,656
Other operating expense 3,501 3,281
---------- ----------
Total non-interest expense 10,834 10,463
---------- ----------
Income before income taxes 4,654 3,673
Provision for income taxes 1,684 1,345
---------- ----------
NET INCOME $ 2,970 $ 2,328
========== ==========
Earnings Per Share (Note 3):
Basic earnings per common share $ 0.48 $ 0.38
========== ==========
Weighted average shares outstanding 6,166,904 6,098,512
========== ==========
Diluted earnings per common share $ 0.47 $ 0.38
========== ==========
Diluted weighted average shares outstanding 6,359,519 6,176,294
========== ==========
Dividends Per Share $ 0.12 $ 0.10
========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2003 2002
---------- ----------
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,970 $ 2,328
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of investment securities available for sale (382) --
Gain on called investment securities available for sale (13) (4)
Depreciation and amortization 1,285 1,236
Provision for loan losses 1,325 1,025
Investment securities amortization, net 262 91
Loss on sale of premises and equipment 63 --
Changes in assets and liabilities:
Loans held for sale 9,988 2,803
Other assets (126) (1,220)
Other liabilities 191 686
-------- --------
Net cash provided by operating activities 15,563 6,945
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale (55,094) (20,239)
Proceeds from maturities of securities available for sale 16,637 3,234
Proceeds from sales of securities available for sale 10,382 --
Proceeds from called securities available for sale 12,500 8,140
Proceeds from called securities held to maturity -- 2,321
Net increase in loans (25,327) (43,826)
Sale of premises and equipment 245 --
Purchases of premises and equipment (777) (179)
-------- --------
Net cash used in investing activities (41,434) (50,549)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 63,352 54,642
Net decrease in securities sold under repurchase agreements
and federal funds purchased (4,819) (8,090)
Cash dividends (679) (610)
Repurchase of common stock -- (100)
Proceeds from exercise of stock options 881 --
-------- --------
Net cash provided by financing activities 58,735 45,842
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 32,864 2,238
CASH AND CASH EQUIVALENTS, beginning of period 33,601 20,677
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 66,465 $ 22,915
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 7,768 $ 8,399
======== ========
Income taxes paid $ 1,864 $ 1,267
======== ========
See accompanying notes to unaudited consolidated financial statements.
6
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Note 1. Basis of Presentation and Accounting Policies
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 accounting principles generally
accepted in the United States of America. In the opinion of management, such
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the financial position,
results of operations and cash flows for the interim periods presented.
Operating results for the six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. Management's discussion and analysis should be read in conjunction with
the consolidated financial statements. Certain amounts and captions relating to
2002 have been reclassified to conform to current year presentation.
Accounting policies followed in the presentation of interim financial results
are presented in Note 2 of CNB Florida Bancshares, Inc.'s (the "Company's")
audited consolidated financial statements included in Form 10-K for the year
ended December 31, 2002, which is available on the Company's web site at
www.cnbnb.com.
Note 2. Consolidation
The consolidated financial statements include the accounts of the Company 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 common share is calculated based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per common share is calculated based on the weighted average number of shares of
common stock outstanding and common stock equivalents, consisting of outstanding
stock options that have a dilutive effect on earnings per share. Common stock
equivalents are determined using the treasury stock method for diluted shares
outstanding. The difference between diluted and basic shares outstanding is
common stock equivalents from stock options outstanding during the periods ended
June 30, 2003 and 2002.
The following table sets forth the computation of earnings per share for the
each of the three and six month periods ended June 30, 2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Numerator:
Net income available to common shareholders $ 1,669 $ 1,333 $ 2,970 $ 2,328
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per common share
Weighted-average shares 6,206,429 6,095,953 6,166,904 6,098,512
Effect of dilutive securities:
Common stock options 188,252 104,953 192,615 77,782
---------- ---------- ---------- ----------
Dilutive potential common shares 188,252 104,953 192,615 77,782
---------- ---------- ---------- ----------
Denominator for diluted earnings per common share
Adjusted weighted average shares 6,394,681 6,200,906 6,359,519 6,176,294
========== ========== ========== ==========
Basic earnings per common share $ 0.27 $ 0.22 $ 0.48 $ 0.38
========== ========== ========== ==========
Diluted earnings per common share $ 0.26 $ 0.21 $ 0.47 $ 0.38
========== ========== ========== ==========
Note 4. Comprehensive Income
Comprehensive income is defined as the change in equity during a period arising
from non-owner transactions and events. The following table details the
Company's comprehensive income for the three and six months ending June 30, 2003
and 2002.
7
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
Unrealized gain (loss) recognized in other comprehensive
income (net):
Available for sale securities $ (98) $ 421 $ (301) $ 160
Interest rate swap designated as cash flow hedge (65) (321) (68) (226)
------- ------- ------- -------
Total unrealized gain (loss) before income taxes (163) 100 (369) (66)
Deferred income taxes 60 (37) 137 24
------- ------- ------- -------
Net of deferred income tax $ (103) $ 63 $ (232) $ (42)
======= ======= ======= =======
Amounts reported in net income:
Securities gains $ 382 $ 4 $ 395 $ 4
Interest rate swap designated as cash flow hedge (88) (69) (171) (138)
Net amortization (accretion) 141 49 262 91
------- ------- ------- -------
Reclassification adjustment 435 (16) 486 (43)
Deferred income taxes (161) 6 (180) 16
------- ------- ------- -------
Reclassification adjustment, net of deferred income tax $ 274 $ (10) $ 306 $ (27)
======= ======= ======= =======
Amounts reported in other comprehensive income:
Net unrealized gain (loss) arising during period, net of tax $ 171 $ 53 $ 74 $ (69)
Reclassification adjustment, net of tax (274) 10 (306) 27
------- ------- ------- -------
Unrealized gain (loss) arising during period, net of tax (103) 63 (232) (42)
Net income 1,669 1,333 2,970 2,328
------- ------- ------- -------
Total comprehensive income $ 1,566 $ 1,396 $ 2,738 $ 2,286
======= ======= ======= =======
Note 5. Stock-Based Compensation
The Company has long-term incentive plans that provide stock-based awards,
including stock options to certain key employees. The Company applies the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting for its stock option and award plans and has
adopted the disclosure-only option under Statement of Financial Accounting
Standards, ("SFAS") No. 123, Accounting for Stock-Based Compensation. If the
Company had adopted the accounting provisions of SFAS 123 and recognized expense
for the fair value of employee stock options granted over the vesting life of
the options, pro forma net income would be as indicated below (dollars in
thousands, except per share data):
For the Six Months Ended
---------------------------------------------------------------
As Reported Pro Forma
-------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ------------
Net income ......................................... $ 2,970 $ 2,328 $ 2,858 $ 2,162
Basic earnings per common share .................... $ 0.48 $ 0.38 $ 0.46 $ 0.35
Diluted earnings per common share .................. $ 0.47 $ 0.38 $ 0.45 $ 0.35
For the Three Months Ended
---------------------------------------------------------------
As Reported Pro Forma
-------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ------------
Net income ......................................... $ 1,669 $ 1,333 $ 1,593 $ 1,215
Basic earnings per common share .................... $ 0.27 $ 0.22 $ 0.26 $ 0.20
Diluted earnings per common share .................. $ 0.26 $ 0.21 $ 0.25 $ 0.20
8
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the grant date using the Black-Scholes option-pricing
model. The Black-Scholes model was developed to estimate the fair value of
traded options, which have different characteristics than employee stock
options, and changes to the subjective assumptions used in the model can result
in materially different fair value estimates. Options to purchase 91,500 shares
of stock with an estimated average fair value of $4.50 per option were granted
during the six months ended June 30, 2003. Options to purchase 112,000 shares
with an estimated average fair value of $4.12 per option were granted during the
six months ended June 30, 2002. The weighted-average grant date fair values of
options granted during 2003 and 2002 were based on the following assumptions:
2003 2002
------- -------
Risk-free interest rate ...................... 2.49% 5.13%
Dividend yield ............................... 1.54% 1.88%
Volatility ................................... 37.00% 38.00%
Expected lives ............................... 6 years 6 years
Compensation expense under the fair value-based method is recognized over the
vesting period of the related stock options and is based on the estimated number
of shares expected to actually vest. Accordingly, the pro forma results of
applying SFAS No. 123 in 2003 and 2002 may not be indicative of future amounts.
Note 6. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143,
Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company adopted the provisions of this Statement on January 1, 2003,
which did not have a significant impact on the Company's consolidated financial
statements.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44
and 64, Amendments of SFAS 13, and Technical Corrections as of May 2002 ("SFAS
145"). SFAS 145 rescinds SFAS 4, Extinguishments of Debt Made to Satisfy
Sinking-Funds Requirements. SFAS 145 also rescinds FAS 44, Accounting for
Intangible Assets of Motor Carriers and amends FAS 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
provisions of this Statement were adopted by the Company on January 1, 2003,
which did not have a significant impact on the Company's consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The provisions of this Statement were adopted by
the Company on January 1, 2003, which did not have a significant impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable-Interest Entities - an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
addresses consolidation by business enterprises of variable interest entities,
which have one or both of the following characteristics: (1) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties,
which is provided through other interests that will absorb some or all of the
expected losses of the entity and (2) the equity investors lack one or more of
the following essential characteristics of a controlling financial interest:
o The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights
9
o The obligation to absorb the expected losses of the entity if they occur,
which makes it possible for the entity to finance its activities
o The right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the expected
losses.
This Interpretation applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The adoption of FIN 46 did not have a significant impact on the
Company's consolidated financial statements.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The provisions of this Statement
that relate to Statement 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. In addition, the provisions
of SFAS 149 which relate to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to both existing
contracts and new contracts entered into after June 30, 2003. The adoption of
SFAS 149 is not expected to have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150").
This Statement establishes standards for classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that financial instruments within its scope be
classified as a liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have
a material impact on the Company's consolidated financial statements.
10
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
Selected Financial Data
Six Months Ended June 30,
Dollars in thousands except per share information. 2003 2002
====================================================================================================================================
SUMMARY OF OPERATIONS:
Total interest income $ 21,442 $ 19,866
Total interest expense (8,120) (7,609)
----------- -----------
Net interest income 13,322 12,257
Provision for loan losses (1,325) (1,025)
----------- -----------
Net interest income after provision for loan losses 11,997 11,232
Non-interest income 3,491 2,904
Non-interest expense (10,834) (10,463)
----------- -----------
Income before taxes 4,654 3,673
Income taxes (1,684) (1,345)
----------- -----------
Net income $ 2,970 $ 2,328
----------- -----------
====================================================================================================================================
PER COMMON SHARE:
Basic earnings $ 0.48 $ 0.38
Diluted earnings 0.47 0.38
Book value 8.61 7.93
Dividends declared 0.12 0.10
Actual shares outstanding 6,220,490 6,095,953
Weighted average shares outstanding 6,166,904 6,098,512
Diluted weighted average shares outstanding 6,359,519 6,176,294
====================================================================================================================================
KEY RATIOS:
Return on average assets 0.78% 0.75%
Return on average shareholders' equity 11.43 9.83
Dividend payout 25.00 26.32
Efficiency ratio 64.44 69.01
Total risk-based capital ratio 8.90 8.66
Average shareholders' equity to average assets 6.82 7.61
Tier 1 leverage 6.20 6.56
====================================================================================================================================
FINANCIAL CONDITION AT PERIOD-END:
Assets $ 792,338 $ 660,943
Loans 630,002 554,992
Deposits 711,988 587,533
Shareholders' equity 53,569 48,352
====================================================================================================================================
11
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
three and six months ended June 30, 2003 and 2002. 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
the Company's Form 10-K for the year ended December 31, 2002. The Company makes
its Securities and Exchange Commission filings available on its website at
www.cnbnb.com. 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 the interest rate environment that may reduce
margins, general economic or business conditions in the Company's markets that
lead to a deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. 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 earnings for the three month period ended June 30, 2003 were
$1.7 million, or $0.26 per diluted share, compared to $1.3 million, or $0.21 per
diluted share, in the second quarter of 2002. For the six months ended June 30,
2003, net income was $3.0 million or $0.47 per diluted share, compared to $2.3
million, or $0.38 per diluted share for the comparable 2002 period. Total assets
increased to $792.3 million at June 30, 2003 compared to $730.7 million at
December 31, 2002 and $660.9 million at June 30, 2002. Total outstanding loans
and deposits rose 14% and 21% to $630.0 million and $712.0 million,
respectively, at June 30, 2003 from $555.0 million and $587.5 million,
respectively, at June 30, 2002.
Net Interest Income
Net interest income is the single largest source of revenue for the Bank and
consists of interest and net loan fee income generated by earning assets, less
interest expense paid on interest bearing liabilities. The Company's primary
objective is to manage its assets and liabilities to provide the largest
possible amount of income while balancing interest rate, credit quality,
liquidity and capital risks. Net interest income for the first half of 2003 was
$13.3 million, compared to $12.3 million for the first six months in 2002, an
increase of 9%. Interest income increased 6% while interest expense increased 7%
for the 2003 second quarter over comparable 2002 amounts. The increase in net
interest income reflects growth in loans, investments and interest bearing
deposits, which were partially offset by higher time deposit balances and
declining rates and spreads.
Total average earning assets increased $141.9 million, or 25% to $715.5
million in 2003, compared to $573.6 million in 2002. The primary drivers of the
increase was due to growth in the average balance of loans and interest bearing
deposits to $611.9 million and $38.2 million at June 30, 2003 from $527.4
million and $0.6 million for the same period in 2002, respectively. Increases in
time, money market and other interest bearing deposits, were the main
contributors in the $123.0 million, or 25% growth in average interest bearing
liabilities.
Net interest margin was 3.76% in the second quarter 2003 compared to 4.37%
in the second quarter 2002 and 3.79% in the first quarter 2003. Total earning
asset yields for the first six months in 2003 decreased to 6.04% from 6.98% in
2002 and rates on interest-bearing liabilities decreased to 2.64% in 2003 from
3.08% in 2002. The decline in net interest margin reflects spread tightening as
a result of declining loan yields and an increase in lower yielding, short-term
investments. The Company continues to maintain an asset sensitive position with
respect to net interest income. Maintaining this profile will allow the Company
to take advantage of a rising rate environment. Tables 1 and 2 provide the
12
Company's average volume of interest earning assets and interest bearing
liabilities for the first half of 2003 and 2002 and the three months ended June
30, 2003 and 2002, respectively.
Table 1: Year to Date Average Balances - Yields and Rates
(Unaudited)
Six Months Ended June 30, 2003 Six Months Ended June 30, 2002
--------------------------------------- ------------------------------------------
Interest Interest
Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate
--------- ----------- ---------- --------- ---------- ----------
(dollars in thousands)
ASSETS:
Federal funds sold $ 12,102 $ 69 1.15% $ 5,234 $ 43 1.66%
Investment securities
available for sale 53,303 977 3.69 37,982 847 4.50
Investment securities
held to maturity - - - 2,364 71 6.06
Loans (1) 611,854 20,150 6.64 527,419 18,900 7.23
Interest bearing deposits 38,206 246 1.30 553 5 1.82
-------- -------- -------- -------- -------- --------
TOTAL EARNING ASSETS 715,465 21,442 6.04 573,552 19,866 6.98
All other assets 53,271 54,643
-------- --------
TOTAL ASSETS $768,736 $628,195
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW and money markets $227,205 $ 1,842 1.63% $179,827 $ 1,580 1.77%
Savings 23,627 58 0.50 21,526 80 0.75
Time deposits 347,303 5,826 3.38 272,248 5,517 4.09
Repurchases and federal
funds purchased 11,986 56 0.94 14,555 108 1.50
Short term borrowings 1,000 14 2.82 - - -
Other borrowings (2) 10,000 324 6.53 10,000 324 6.53
-------- -------- -------- -------- -------- --------
TOTAL INTEREST BEARING
LIABILITIES 621,121 8,120 2.64 498,156 7,609 3.08
Demand deposits 89,142 77,613
Other liabilities 6,053 4,651
Shareholders' equity 52,420 47,775
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $768,736 $628,195
======== ========
-------- --------
INTEREST SPREAD (3) 3.40% 3.90%
======== ========
-------- --------
NET INTEREST INCOME $ 13,322 $ 12,257
======== ========
-------- --------
NET INTEREST MARGIN (4) 3.75% 4.31%
======== ========
----------
(1) Interest income on average loans includes loan fee recognition of $282,000
and $234,000 in 2003 and 2002, respectively.
(2) Interest expense and average rate amounts include the impact of the
Company's $10 million pay-fixed interest rate swap that is accounted for as
a cash flow hedge of other borrowings.
(3) Represents the average rate earned minus average rate paid.
(4) Represents net interest income divided by total earning assets.
13
Table 1a: Analysis of Year to Date Changes in Interest Income and Expense
(Unaudited)
NET CHANGE JUNE 30, NET CHANGE JUNE 30,
2002-2003 ATTRIBUTABLE TO: 2001-2002 ATTRIBUTABLE TO:
----------------------------------- -----------------------------------
Net Net
Volume (1) Rate (2) Change Volume (1) Rate (2) Change
---------- -------- ------- ---------- -------- --------
(thousands)
INTEREST INCOME:
Federal funds sold $ 56 $ (30) $ 26 $ 99 $ (84) $ 15
Investment securities available for sale 342 (212) 130 143 (275) (132)
Investment securities held to maturity (71) - (71) (142) (2) (144)
Loans 3,026 (1,776) 1,250 4,810 (4,357) 453
Interest bearing deposits 340 (99) 241 3 - 3
------- ------- ------- ------- ------- -------
Total 3,693 (2,117) 1,576 4,913 (4,718) 195
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW and money markets 416 (154) 262 766 (1,126) (360)
Savings 8 (30) (22) 25 (54) (29)
Time deposits 1,521 (1,212) 309 2,002 (3,079) (1,077)
Repurchases and federal funds
purchased (19) (33) (52) (9) (242) (251)
Short term borrowings 14 - 14 (866) - (866)
Other borrowings - - - 324 - 324
------- ------- ------- ------- ------- -------
Total 1,940 (1,429) 511 2,242 (4,501) (2,259)
------- ------- ------- ------- ------- -------
Net interest income $ 1,753 $ (688) $ 1,065 $ 2,671 $ (217) $ 2,454
======= ======= ======= ======= ======= =======
----------
(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.
14
Table 2: Quarterly Average Balances - Yields and Rates
(Unaudited)
Three Months Ended June 30, 2003 Three Months Ended June 30, 2002
----------------------------------------- ------------------------------------------
Interest Interest
Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate
--------- ----------- ---------- --------- ---------- ----------
(dollars in thousands)
ASSETS:
Federal funds sold $ 11,191 $ 31 1.11% $ 7,290 $ 29 1.60%
Investment securities
available for sale 58,740 516 3.52 37,286 411 4.42
Investment securities
held to maturity - - - 1,901 30 6.33
Loans (1) 619,581 10,075 6.52 540,361 9,648 7.16
Interest bearing deposits 32,588 123 1.51 666 4 2.41
-------- -------- -------- -------- -------- --------
TOTAL EARNING ASSETS 722,100 10,745 5.97 587,504 10,122 6.91
All other assets 56,128 53,830
-------- --------
TOTAL ASSETS $778,228 $641,334
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW and money markets $231,501 $ 899 1.56% $187,711 $ 817 1.75%
Savings 24,005 29 0.48 22,043 41 0.75
Time deposits 347,706 2,856 3.29 275,859 2,654 3.86
Repurchases and federal
funds purchased 12,331 29 0.94 13,026 47 1.45
Short term borrowings 1,000 7 2.81 - - -
Other borrowings (2) 10,000 163 6.54 10,000 163 6.54
-------- -------- -------- -------- -------- --------
TOTAL INTEREST BEARING
LIABILITIES 626,543 3,983 2.55 508,639 3,722 2.94
Demand deposits 92,525 79,987
Other liabilities 5,979 4,716
Shareholders' equity 53,181 47,992
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $778,228 $641,334
======== ========
-------- --------
INTEREST SPREAD (3) 3.42% 3.97%
======== ========
-------- --------
NET INTEREST INCOME $ 6,762 $ 6,400
======== ========
-------- --------
NET INTEREST MARGIN (4) 3.76% 4.37%
======== ========
----------
(1) Interest income on average loans includes loan fee recognition of $128,000
and $111,000 in 2003 and 2002, respectively.
(2) Interest expense and average rate amounts include the impact of the
Company's $10 million pay-fixed interest rate swap that is accounted for as
a cash flow hedge of other borrowings.
(3) Represents the average rate earned minus average rate paid.
(4) Represents net interest income divided by total earning assets.
15
Table 2a: Analysis of Quarterly Changes in Interest Income and Expense
(Unaudited)
NET CHANGE JUNE 30, NET CHANGE JUNE 30,
2002-2003 ATTRIBUTABLE TO: 2001-2002 ATTRIBUTABLE TO:
------------------------------- -------------------------------
Net Net
Volume (1) Rate (2) Change Volume (1) Rate (2) Change
---------- -------- --------- --------- -------- ---------
(thousands)
INTEREST INCOME:
Federal funds sold $ 16 $ (14) $ 2 $ 76 $ (60) $ 16
Investment securities available for sale 236 (132) 104 58 (107) (49)
Investment securities held to maturity (30) - (30) (75) 1 (74)
Loans 1,414 (987) 427 2,116 (2,007) 109
Interest bearing deposits 192 (73) 119 - 4 4
------- ------- ------- ------- ------- -------
Total 1,828 (1,206) 622 2,175 (2,169) 6
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW and money markets 191 (109) 82 344 (506) (162)
Savings 4 (16) (12) 11 (22) (11)
Time deposits 691 (489) 202 794 (1,622) (828)
Repurchases and federal funds
purchased (3) (15) (18) (33) (93) (126)
Short term borrowings 7 - 7 (329) - (329)
Other borrowings - - - 163 - 163
------- ------- ------- ------- ------- -------
Total 890 (629) 261 950 (2,243) (1,293)
------- ------- ------- ------- ------- -------
Net interest income $ 938 $ (577) $ 361 $ 1,225 $ (74) $ 1,299
======= ======= ======= ======= ======= =======
----------
(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 three and six months ended June 30, 2003
increased $369,000, or 25% and $587,000, or 20%, respectively, from the
comparable periods in 2002. The increases were primarily attributed to a
$382,000 gain on the sale of investment securities during the 2003 second
quarter. The securities sold were short dated, callable agency debt instruments
with premiums resulting from continued interest rate declines and were sold as a
partial hedge of the continued margin compression. Other changes in non-interest
income for the three and six month periods include increases in deposit service
charges of $90,000 and $205,000, respectively for the two periods. These
increases were partially offset by declines in secondary market mortgage fees of
$138,000 and $104,000 for three and six month periods ended June 30, 2003
compared to comparable periods in 2002. The lower level of secondary market
mortgage income is attributable to a temporary reduction in loan production
staff resulting from organizational changes within the mortgage function. Other
fee income, which includes credit card fees, credit life insurance income, safe
deposit box fees, discount brokerage fees and other miscellaneous fees,
increased $39,000 and $95,000 for the three and six month periods ended June 30,
2003 compared to the corresponding 2002 periods.
Non-interest income, annualized, as a percentage of average assets was
0.92% for the six months ended June 30, 2003, compared to 0.93% for the
comparable period in 2002.
16
Non-Interest Expense
Non-interest expense was $5.4 million and $10.8 million for the three and
six month periods ended June 30, 2003 compared to $5.3 million and $10.5 million
for the respective 2002 periods, an increase of 1% and 4%, respectively. This
increase is primarily attributable to nominal increases in personnel, occupancy,
equipment and data processing expenses. Annualized, non-interest expense as a
percentage of average assets was 2.8% for the first half of 2003, compared to
3.4% for the 2002 comparable period, reflecting the Company's continued focus on
overhead expense management. Salaries and employee benefits increased $24,000 or
1% to $5.6 million for the first half of 2003, compared to $5.5 million for the
same period in 2002. As a percentage of average assets annualized, salaries and
employee benefits decreased to 1.5% from 1.8%, for the first half of 2003 and
2002, respectively. Average full-time equivalent employees increased by 8 from
June 30, 2002 to June 30, 2003.
Occupancy expense (including premises, furniture, fixtures and equipment)
increased in the three and six month periods of 2003 by $46,000, or 6% and
$127,000, or 8%, respectively, over the comparable periods in 2002. The increase
is primarily attributable to an increase in property taxes, building
depreciation and data processing depreciation expenses. These expenses are
expected to increase as the Company adds two additional branches over the
remainder of 2003. One branch opened in July 2003 and the other is expected to
open during the fourth quarter 2003.
Other operating expenses increased $220,000, or 7%, in the first half of
2003 compared to the same period in 2002. The following table details the areas
of significance in other operating expenses. The increase in data processing
fees is due to higher core processing expenses associated with higher
transaction volumes and costs associated with information technology
enhancements implemented during the second quarter. Loan expenses increased as a
result of the increase in non-performing loans in the fourth quarter of 2002.
The increase in other expenses was due to a $63,000 loss on the sale of certain
excess bank real estate during the second quarter.
Table 3: Other Operating Expenses
Six Months Ended June 30,
2003 2002
------ ------
(thousands)
Data processing $ 734 $ 662
Legal and professional 392 408
Communications 374 362
Postage and delivery 373 354
Amortization of intangible assets 363 374
Advertising and promotion 241 218
Supplies 192 217
Regulatory fees 133 117
Loan expenses 126 71
Administrative 71 86
Other general operating 64 49
Education expense 62 64
Insurance and bonding 60 39
Dues and subscriptions 51 49
Directors fees 47 42
Other 218 169
------ ------
Total other operating expenses $3,501 $3,281
====== ======
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 annual
effective tax rate for 2003 is approximately 36%.
17
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 $123.3
million and represented 18% of average total deposits during the first half of
2003, compared to $61.1 million and 11% for 2002. Average loans were 89% and 96%
of average deposits for the six-month period ended June 30, 2003 and 2002,
respectively.
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. The Bank is also a member of the Federal
Home Loan Bank and has access to short-term and long-term funds. In addition,
the Company entered into a line of credit with one of its correspondent banks in
April 2001. The agreement was amended in October 2001 to reflect the following
structures: (1) a $3 million revolving line of credit maturing on June 30, 2003
(subsequently renewed through June 30, 2004) with interest floating quarterly at
3-month Libor plus 145 basis points; and (2) a $10 million term loan maturing
October 3, 2006 with interest floating quarterly at 3-month Libor plus 170 basis
points. Semi-annual principal payments of approximately $714,000 begin in 2004.
The Company also 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 in (2) above. The fair
value of the interest rate swap at June 30, 2003 was approximately ($759,000).
There was $1 million outstanding on the $3 million line of credit on June 30,
2003. The term loan, line of credit and interest rate swap are all
collateralized by 100% of the common stock of the Bank.
In connection with the term loan and line of credit agreement, the Company
is required to maintain compliance with certain covenants and restrictions. The
following financial covenants are to be maintained on a quarterly basis and are
calculated at the Bank-level:
o Interest coverage ratio of greater than or equal to 2.00x through September
30, 2003.
o Debt service coverage ratio of greater than or equal to 0.85x through
September 30, 2002; 1.00x from October 1, 2002 through September 30, 2003;
1.25x from October 1, 2003 through September 30, 2004; and 1.50x from
October 1, 2004 through maturity.
o Ratio of non-performing assets to total loans plus other real estate owned
and repossessed assets of less than or equal to 1.25%.
o Maintenance of tier 1 and total risk based capital ratios that meet the
benchmarks for consideration as a "well-capitalized" institution (currently
6% and 10%, respectively). Also, maintenance of a leverage capital ratio of
at least 6%.
In addition, the Company is subject to the following restrictions:
o No additional debt is permitted without consent of the lender.
o No increases in dividends paid by the Company to its common shareholders
are permitted without consent of the lender.
Failure to maintain any of these covenants would place the Company in
default of the line of credit agreement. In such a case, absent any waivers
obtained from the lender, all amounts payable could be accelerated and become
due immediately. As of June 30, 2003, the Company was in compliance with all
covenants.
18
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 that 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 liquidity position increased during the first half of 2003 as
compared to the first half of 2002 as average loan balances increased $84.4
million while deposit growth increased $136.1 million. Excess funds were
deployed in investment securities, interest bearing deposits with banks and
federal funds sold. The Company continues to maintain an asset sensitive
position with respect to net interest income. The Company currently anticipates
that market interest rates will remain at current low levels into 2004 with
increases then expected to be slow and protracted.
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. This analysis includes assumptions about
balance sheet growth and related mix as well as pricing and maturity profile.
Included in the review is an internal analysis of the possible impact on net
interest income due to market changes in interest rates. Based on this internal
analysis, at June 30, 2003, a gradual increase in interest rates of 200 basis
points would have increased net interest income over the ensuing twelve-month
period by 5.10% as compared to a projection under stable rates. A gradual
decrease in interest rates of 200 basis points over this same period would have
decreased net interest income by 5.28% as compared to a stable rate environment.
At June 30, 2003, the Bank's net economic value ratio was 10.10% and 10.38%,
assuming a gradual increase or decrease, respectively, in interest rates of 200
basis points over a 12-month period. The net economic value ratio is the market
value of equity divided by the market value of assets and measures the Bank's
capitalization, talking into account balance sheet gains and losses. The
computations of interest rate risk do not necessarily include certain actions
that management may undertake to manage this risk in response to anticipated
changes in interest rates.
Table 4, "Rate Sensitivity Analysis", presents rate sensitive assets and
liabilities, separating the assets and liabilities into fixed and variable
interest rate categories. 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 June 30, 2003, the estimated
fair values would necessarily have been achieved at that date, since market
values may differ depending on various circumstances.
19
Table 4: Rate Sensitivity Analysis
June 30, 2003
(dollars in thousands) Fair
1 Year 2 Years 3 Years 4 Years 5 Years Beyond TOTAL Value
--------- --------- --------- --------- --------- --------- --------- ---------
INTEREST-EARNING ASSETS:
Gross Loans
Fixed rate loans $ 122,143 $ 51,772 $ 41,089 $ 48,163 $ 48,497 $ 107,395 $ 419,059 $ 431,507
Average interest rate 6.58% 7.24% 7.17% 7.07% 6.77% 6.55% 6.79%
Variable rate loans 67,523 12,636 26,180 11,529 10,804 82,271 210,943 216,949
Average interest rate 4.89% 5.66% 4.86% 5.65% 6.59% 6.90% 5.84%
Investment securities (1)
Fixed rate investments 4,541 - 1,487 5,514 - 49,496 61,038 61,589
Average interest rate 1.20% 4.71% 2.15% 4.09% 3.71%
Variable rate investments - - - - - 370 370 380
Average interest rate 4.04% 4.04%
Federal funds sold 17,900 - - - - - 17,900 17,900
Average interest rate 1.10% 1.10%
Other earning assets (2) 30,529 - - - - - 30,529 30,529
Average interest rate 1.64% 1.64%
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 242,636 $ 64,408 $ 68,756 $ 65,206 $ 59,301 $ 239,532 $ 739,839 $ 758,854
Average interest rate 4.98% 6.93% 6.24% 6.40% 6.74% 6.16% 5.91%
========= ========= ========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
NOW $ 69,098 $ - $ - $ - $ - $ 64,512 $ 133,610 $ 133,610
Average interest rate 1.86% 0.40% 1.16%
Money market 102,701 - - - - 4,519 107,220 107,220
Average interest rate 2.29% 1.25% 2.25%
Savings - - - - - 24,628 24,628 24,628
Average interest rate 0.50% 0.50%
CD's under $100,000 108,432 39,701 20,032 8,524 848 - 177,537 179,122
Average interest rate 2.55% 3.83% 3.98% 4.17% 4.49% 3.08%
CD's $100,000 and over 116,782 29,136 13,480 6,077 2,496 - 167,971 169,400
Average interest rate 3.03% 3.87% 4.22% 4.27% 4.94% 3.34%
Securities sold under
repurchase agreements and
federal funds purchased 9,627 - - - - - 9,627 9,627
Average interest rate 0.95% 0.95%
Short-term borrowings 1,000 - - - - - 1,000 1,000
Average interest rate 2.74% 2.74%
Other borrowings (3) 714 1,428 7,858 - - - 10,000 10,000
Average interest rate 3.46% 3.46% 3.46% 3.46%
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 408,354 $ 70,265 $ 41,370 $ 14,601 $ 3,344 $ 93,659 $ 631,593 $ 634,607
Average interest rate 2.47% 3.84% 3.96% 4.21% 4.83% 0.47% 2.48%
========= ========= ========= ========= ========= ========= ========= =========
----------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net unrealized gains of $561,000.
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank Stock,
Federal Home Loan Bank Stock and other marketable equity securities.
(3) Other borrowings consists of a term loan maturing October 3, 2006 that bears
interest at 3-month Libor plus 170 basis points. The variable rate is reset
quarterly. The variable interest payments on the term loan are being hedged
through an interest rate swap. Under the interest rate swap, the Company
pays a fixed rate of interest of 6.45% and receives a floating rate of
interest of 3-month Libor plus 170 basis points. Other terms of the swap
mirror those of the term debt.
20
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, were 76% of total deposits at June 30, 2003, up slightly
from 75% at December 31, 2002. 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 5, 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. Essentially all
of the time deposits with balances of $100,000 or more are from customers in the
Bank's primary markets.
Table 5: Maturity of Time Deposits of $100,000 or More
June 30, 2003
(dollars in thousands)
Amount
------
Three months or less $ 41,829
Three through six months 33,391
Six through twelve months 41,562
Over twelve months 51,189
--------
Total $167,971
========
EARNING ASSETS
Loans
Lending activities are the Company's single largest source of revenue.
Although management is continually evaluating alternative sources of revenue,
lending is the major segment of the Company's business and is key to
profitability. During the first half of 2003, average loans were $611.9 million
and were 89% of average deposits, compared to $527.4 million and 96% for the
same period in 2002. The following table reflects the composition of the
Company's loan portfolio as of June 30, 2003 compared to December 31, 2002.
Table 6: Loan Portfolio Composition
June 30, December 31,
2003 2002
-------------- ---------------
(thousands)
Commercial $ 104,778 $ 111,033
Commercial real estate 341,088 324,525
Mortgages (including home equity) 144,367 132,513
Consumer 31,823 32,199
Credit card 1,060 1,164
Tax free 6,886 4,351
--------- ---------
Total loans, net of unearned income 630,002 605,785
Less: allowance for loan losses (6,788) (6,574)
--------- ---------
Net loans $ 623,214 $ 599,211
========= =========
Loan concentrations are considered to exist where there are amounts loaned
to multiple borrowers engaged in similar activities which collectively would be
similarly impacted by economic or other conditions and when the total of such
amounts exceeds 25% of total capital. Due to the lack of diversified industry
and the relative proximity of markets served, the Company has concentrations of
loans from the North Florida region as well as the types of loans funded. The
Bank's four largest concentration categories are: Land Development ($35.6
million), Commercial Real Estate ($30.6 million), Professional ($29.5 million)
and Commercial Construction ($24.5 million).
21
Loan Quality
The allowance for loan loss is established through a provision for loan
loss charged to expense. Loans are charged against the allowance for loan loss
when management believes that the collectibility of the principal is unlikely.
The allowance for loan loss is an amount that management believes will be
adequate to absorb inherent losses on existing loans that are probable of
becoming uncollectible based on evaluations of the collectibility of the loans.
The evaluations take into consideration such objective factors as changes in the
nature and volume of the loan portfolio and historical loss experience. The
evaluation also considers certain subjective factors such as overall portfolio
quality, review of specific problem loans and current economic conditions that
may affect the borrowers' ability to pay. The level of the allowance for loan
loss is also impacted by increases and decreases in loans outstanding, because
either more or less allowance is required as the amount of the Company's credit
exposure changes. To the extent actual loan losses differ materially from
management's estimate of these subjective factors, loan growth/run-off
accelerates or the mix of loan types changes, the level of the provision for
loan loss, and related allowance, can and will fluctuate.
The allowance for loan losses on June 30, 2003, was 1.08% of total loans,
compared to 1.09% at December 31, 2002 and 1.04% at June 30, 2002. Table 7:
"Allocation of Allowance for Loan Losses", set forth below, indicates the
specific reserves allocated by loan type.
Table 7: Allocation of Allowance for Loan Losses
June 30, December 31,
2003 2002
------------------------ -------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
--------- ------------- --------- -------------
(dollars in thousands)
Commercial $2,151 16.6% $1,991 18.3%
Commercial real estate 3,172 54.1 3,180 53.6
Mortgages (including home equity) 672 22.9 495 21.9
Consumer 647 5.1 802 5.3
Credit card 130 0.2 106 0.2
Tax free - 1.1 - 0.7
Unallocated 16 - - -
------ ----- ------ -----
Total $6,788 100.0% $6,574 100.0%
====== ===== ====== =====
Non-performing assets consist of non-accrual loans, loans past due 90 days
or more and still accruing interest, other real estate owned and repossessions.
Non-performing assets decreased 18% from December 31, 2002 to $6.6 million at
June 30, 2003. Non-performing assets as a percentage of total assets decreased
to 0.84% on June 30, 2003 from 1.11% on December 31, 2002.
Table 8: Non-Performing Assets
June 30, December 31,
2003 2002
---------- ----------
(dollars in thousands)
Non-accrual loans $ 6,116 $ 5,611
Past due loans 90 days or
more and still accruing 352 2,439
Other real estate owned
and repossessions 171 24
------ -------
Total non-performing assets $ 6,639 $ 8,074
====== =======
Percent of total assets 0.84% 1.11%
22
Table 9: Activity in Allowance for Loan Losses
June 30,
2003 2002
---------- ----------
(dollars in thousands)
Balance at beginning of year $ 6,574 $ 5,205
Loans charged-off:
Commercial (709) (284)
Commercial real estate (90) (33)
Mortgage (including home equity) (41) (68)
Consumer (286) (133)
Credit card (31) (46)
Tax free - -
--------- ---------
Total loans charged-off (1,157) (564)
Recoveries on loans previously charged-off:
Commercial 10 9
Commercial real estate - 2
Mortgage (including home equity) 1 29
Consumer 31 39
Credit card 4 5
Tax free - -
--------- ---------
Total loan recoveries 46 84
--------- ---------
Net loans charged-off (1,111) (480)
--------- ---------
Provision for loan losses charged to expense 1,325 1,025
--------- ---------
Ending balance $ 6,788 $ 5,750
========= =========
Total loans outstanding $ 630,002 $ 554,992
Average loans outstanding $ 611,854 $ 527,419
Allowance for loan losses to loans outstanding 1.08% 1.04%
Net charge-offs to average loans outstanding, annualized 0.37% 0.18%
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 $65.1 million at June 30, 2003, an increase of 31% from $49.7
million at the end of 2002. The increase was partially the result of the
Company's desire to invest a portion of its excess liquidity into longer-dated
investments in order to take advantage of higher yields on funds that were not
expected to be immediately deployed into loans.
Securities are classified as either held-to-maturity or available-for-sale.
At June 30, 2003 investment securities available-for-sale made up 100% of the
total investment portfolio of $65.1 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 deferred income tax, as accumulated other comprehensive income (loss). Also
included in other comprehensive income (loss) are accumulated net gains (losses)
on cash flow hedges. At June 30, 2003, accumulated other comprehensive income
(loss), net of tax, was ($124,000), compared to $108,000 at December 31, 2002.
Of this amount, $352,000 of unrealized gains, net of deferred income tax, were
related to the securities available for sale portfolio while ($476,000) of
unrealized losses, net of deferred income tax, were associated with cash flow
hedges.
The Company invests primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States and
obligations of agencies of the United States government. In addition, the
Company enters into federal funds transactions with its principal correspondent
banks. The Federal Reserve Bank and FHLB also require equity investments to be
maintained by the Company.
23
The following tables set forth the maturity distribution and the
weighted average yields of the Company's investment portfolio.'
Table 10: Maturity Distribution of Investment Securities (1)
June 30, 2003
(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 $ - $ - $ 4,041 $ 4,051
------- ------- ------- -------
Total U.S. Treasury - - 4,041 4,051
U.S. Government Agencies
and Corporations (2):
One year or less - - 500 500
Over one through five years - - 7,001 7,023
Over five through ten years - - 10,000 10,237
Over ten years - - 10,000 10,000
------- ------- ------- -------
Total U.S. Government Agencies
and Corporations - - 27,501 27,760
Obligations of State and Political
Subdivisions:
Over ten years - - 2,172 2,305
------- ------- ------- -------
Total Obligations of State and
Political Subdivisions - - 2,172 2,305
Mortgage-Backed Securities (3):
Over five through ten years - - 20,339 20,389
Over ten years - - 7,355 7,464
------- ------- ------- -------
Total Mortgage-Backed Securities - - 27,694 27,853
Other Securities:
Over ten years (4) - - 3,119 3,119
------- ------- ------- -------
Total Other Securities - - 3,119 3,119
Total Securities $ - $ - $64,527 $65,088
======= ======= ======= =======
----------
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Includes securities that may be callable prior to their stated maturity
date.
(3) Represents investments in mortgage-backed securities which are subject to
early repayment.
(4) Represents investment in Federal Reserve Bank and Federal Home Loan Bank
stock and other marketable equity securities.
Table 11: Weighted Average Yield by Range of Maturities
June 30, 2003 December 31, 2002 June 30, 2002
------------- ----------------- -------------
One Year or Less 1.21% 2.41% 2.44%
More than One through Five Years 2.69% 4.87% 5.23%
More than Five through Ten Years 3.61% 4.48% 4.99%
More than Ten Years (1) 4.16% 4.46% 4.58%
----------
(1) Includes adjustable rate mortgage-backed securities which are repriceable
within one year.
24
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 June 30, 2003 and December 31, 2002.
Table 12: Total Deposits
June 30, December 31,
2003 2002
----------- ------------
(thousands)
Non-interest bearing:
Demand checking $ 101,022 $ 80,065
Interest bearing:
NOW checking 133,610 118,619
Money market checking 107,220 95,354
Savings 24,628 22,311
Certificates of deposit 345,508 332,287
-------- --------
Total deposits $ 711,988 $ 648,636
======== ========
CAPITAL RESOURCES
Shareholders' equity at June 30, 2003 was $53.6 million, as compared to
$50.9 million at December 31, 2002. During the first and second quarter of 2003,
the Board of Directors declared quarterly dividends of $0.06 per share, an
increase of 20% from the fourth quarter 2002 dividend. At June 30, 2003, the
Company's common stock had a book value of $8.61 per share compared to $8.31 per
share at December 31, 2002.
The Company is subject to various regulatory 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 judgments 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 June 30, 2003, the Bank met all capital adequacy
requirements to which it is subject.
25
At June 30, 2003 and 2002, the Company's Tier 1 capital, Total risk-based
capital and Tier 1 leverage ratios were are as follows:
Table 13: Capital Ratios
June 30, Well-Capitalized Regulatory
2003 2002 Requirements Minimums
------------ ------------ ------------ --------
Risk Based Capital Ratios:
Tier 1 Capital Ratio 7.8% 7.6% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 8.9% 8.7% 10.0% 8.0%
Tier 1 Leverage Ratio 6.2% 6.6% 5.0% 4.0%
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the
portrayal of the Company's financial condition and requires management's most
difficult, subjective or complex judgments. The circumstances that make these
judgments difficult, subjective or complex have to do with the need to make
estimates about the effect of matters that are inherently uncertain. The
Company's considers the establishment and maintenance of the allowance for loan
loss and the accounting for its core deposit intangible asset to be critical
accounting policies.
The allowance for loan loss is established through a provision for loan
loss charged to expense. Loans are charged against the allowance for loan loss
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
inherent losses on existing loans that may become uncollectible based on
evaluations of the collectibility of the loans. The evaluations take into
consideration such objective factors as changes in the nature and volume of the
loan portfolio and historical loss experience. The evaluation also considers
certain subjective factors such as overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrowers'
ability to pay. The level of the allowance for loan loss is also impacted by
increases and decreases in loans outstanding, because either more or less
allowance is required as the amount of the Company's credit exposure changes. To
the extent actual loan losses differ materially from management's estimate of
these subjective factors, loan growth/run-off accelerates or the mix of loan
types changes, the level of the provision for loan loss, and related allowance,
can and will fluctuate.
The accounting for the Company's core deposit intangible asset is also
subject to significant estimates about future results. In connection with the
acquisition of the Lake City and Live Oak branches of Republic Bank in 2001, the
Company recorded a core deposit intangible of approximately $6,000,000. This
intangible asset is being amortized on a straight-line basis over its estimated
useful life of 10 years. The life of this asset was based on the estimated
future period of benefit to the Company of the depositor relationships acquired.
To the extent that the deposit accounts acquired leave the Company faster than
anticipated, the amount of the core deposit intangible that is amortized each
period could increase significantly, thus shortening its useful life. Through
June 30, 2003, the performance of the depositor relationships did not differ
materially from expectations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In 1997 the Securities and Exchange Commission adopted amendments to
Regulation S-K, Regulation S-X, and various forms to clarify and expand existing
requirements for disclosures about derivatives and market risks inherent in
derivatives and other financial instruments. As noted below, at June 30, 2003,
the Company was a party to a single interest rate derivative contract. The
Company also holds other financial instruments, which include investments, loans
and deposit liabilities. The release requires quantitative and qualitative
disclosures about market risk. See the section titled "Liquidity and Interest
Rate Sensitivity" for further discussion on the Company's management of interest
rate risk.
26
The Company's sole derivative contract is a $10 million notional interest
rate swap that was entered into as a hedge of interest rate risk inherent in the
Company's $10 million term loan. Under the terms of the swap, the Company will
receive a variable rate of interest equal to 90-day Libor plus 170 basis points,
reset quarterly. The Company will pay a fixed rate of interest equal to 6.45%
for the life of the contract. All cash flows are computed based on the $10
million notional amount and are settled quarterly on a net basis. The contract
matures October 3, 2006 and the notional amount will be reduced by $714,286 on a
semi-annual basis beginning April 2004. The fair value of the swap at June 30,
2003, including interest accruals, was approximately ($759,000). The swap is
being accounted for as a cash flow hedge of the variable interest payments under
the $10 million term debt.
Non-derivative financial instruments that have market risk are included in
Table 3: "Rate Sensitivity Analysis". These instruments are shown by maturity,
separated by fixed and variable interest rates. The estimated fair value of each
instrument category is also shown in the table. While these estimates of fair
value are based on management's judgment of the most appropriate factors, there
is no assurance that, were the Company to have disposed of such instruments at
June 30, 2003, 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 June 30, 2003 would not necessarily be considered
to apply at subsequent dates.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), within the 90 days prior to the filing date of this report, the
Company carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. This evaluation
was carried out under the supervision and with the participation of the
Company's Chief Financial Officer and Chief Executive Officer. Based upon that
evaluation, the Company's Chief Financial Officer and Chief Executive Officer
have concluded that the Company's disclosure controls and procedures are
effective in alerting them to material information regarding the Company's
financial statement and disclosure obligation in order to allow the Company to
meet its reporting requirements under the Exchange Act in a timely manner.
Changes in Internal Control
There have been no changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
27
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 and Use of Proceeds - Not applicable.
Item 3. Defaults Upon Senior Securities - Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders - On May 28, 2003,
the Company held its Annual Meeting of Shareholders, whereby the Board
of Directors (Thomas R. Andrews, Lewis Ansbacher, Audrey S. Bullard,
Raymon Land, Sr., Jon W. Pritchett, Marvin H. Pritchett, Halcyon E.
Skinner, William Streicher and K. C. Trowell) were elected. The
following summarizes all matters submitted and voted upon at this
annual meeting:
(a) The following directors were elected to serve on the Board of
Directors. Except for Mr. Ansbacher, these individuals served on the
Board of Directors prior to the Annual Meeting. The number of votes
cast were as follows:
Against/ Abstentions/
For Withheld Broker Non-Votes
Thomas R. Andrews 5,073,155 16,526 0
Lewis Ansbacher 5,073,155 16,526 0
Audrey S. Bullard 5,066,997 22,684 0
Raymon Land, Sr. 5,033,363 56,318 0
Jon W. Pritchett 5,066,997 22,684 0
Marvin H. Pritchett 5,066,997 22,684 0
Halcyon E. Skinner 5,073,155 16,526 0
William Streicher 5,073,155 16,526 0
K. C. Trowell 5,063,747 25,934 0
Item 5. Other Information - Not applicable.
Item 6. Exhibits and Reports -
(a) Exhibits:
3i Articles of Incorporation of CNB Florida Bancshares, Inc.
(Exhibit 3(i) to the Company's Annual Report on Form 10-Q/A
filed with the Commission on May 21, 2003 is hereby
incorporated by reference.)
3ii By-Laws of CNB Florida Bancshares, Inc. (Exhibit 3(ii) to
the Company's Annual Report on Form 10-Q/A filed with the
Commission on May 21, 2003 is hereby incorporated by
reference.)
31(a) Chief Executive Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31(b) Chief Financial Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32(a) Chief Executive Officer certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32(b) Chief Financial Officer certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On April 28, 2003, the Company filed a Form 8-K to report its 2003 first
quarter results.
28
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: August 12, 2003
29