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, 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 July 31, 2001 was 6,100,376 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......................................................21 Capital Resources................................................... 21 Item 3. Quantitative and Qualitative Disclosure About Market Risk...22 PART II - OTHER INFORMATION Item 1. Legal Proceedings...........................................23 Item 2. Changes in Securities ......................................23 Item 3. Defaults Upon Senior Securities ............................23 Item 4. Submission of Matters to a Vote of Security Holders ........23 Item 5. Other Information ..........................................23 Item 6. Exhibits and Reports on Form 8-K ...........................23 2 PART I FINANCIAL INFORMATION CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited) (Audited) June 30, December 31, 2001 2000 ---------- ------------ ASSETS (thousands) Cash and cash equivalents: Cash and due from banks $ 24,156 $ 20,769 Federal funds sold 475 - Interest bearing deposits in other banks 520 129 ------- ------- Total cash and cash equivalents 25,151 20,898 Investment securities available for sale 33,064 33,236 Investment securities held to maturity 6,213 7,460 Loans: Commercial, financial and agricultural 238,986 192,540 Real estate - mortgage 155,218 120,663 Real estate - construction 46,919 33,648 Installment and consumer 38,942 33,970 ------- ------- Total loans, net of unearned income 480,065 380,821 Less: Allowance for loan losses (4,558) (3,670) ------- ------- Net loans 475,507 377,151 Premises and equipment, net 25,279 22,433 Intangible assets 6,865 1,034 Other assets 4,880 5,381 ------- ------- TOTAL ASSETS $ 576,959 $ 467,593 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 67,520 $ 52,082 Savings, NOW and money market 173,640 129,865 Time (under $100,000) 148,287 115,406 Time ($100,000 and over) 100,029 70,333 ------- ------- Total deposits 489,476 367,686 Securities sold under repurchase agreements and federal funds purchased 11,501 21,142 Short term borrowings 25,000 30,000 Other liabilities 5,071 4,129 ------- ------- Total liabilities 531,048 422,957 ------- ------- 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; 6,099,376 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 61 61 Additional paid-in capital 30,595 30,581 Retained earnings 14,870 14,027 Accumulated other comprehensive income (loss), net of tax 385 (33) ------- ------- Total shareholders' equity 45,911 44,636 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 576,959 $ 467,593 ======= ======= 3 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (Unaudited) Six Months Ended June 30, 2001 2000 --------- --------- (thousands) Interest Income Interest and fees on loans $ 18,447 $ 13,042 Interest on investment securities held to maturity 215 297 Interest on investment securities available for sale 979 1,061 Interest on federal funds sold 28 160 Interest on interest bearing deposits 2 40 --------- ---------- Total interest income 19,671 14,600 Interest Expense Interest on deposits 8,643 5,836 Interest on repurchases and federal funds purchased 359 190 Interest on short term borrowings 866 169 --------- --------- Total interest expense 9,868 6,195 --------- --------- Net interest income 9,803 8,405 Provision for Loan Losses 900 600 --------- --------- Net interest income after provision for loan losses 8,903 7,805 Non-interest Income Service charges 1,218 1,059 Other fees and charges 1,238 492 --------- --------- Total non-interest income 2,456 1,551 --------- --------- Non-interest Expense Salaries and employee benefits 4,977 4,159 Occupancy and equipment expenses 1,396 1,018 Other operating expenses 2,748 2,278 --------- --------- Total non-interest expense 9,121 7,455 --------- --------- Income before income taxes 2,238 1,901 Income taxes 785 657 --------- --------- NET INCOME $ 1,453 $ 1,244 ========= ========= Earnings Per Share (Note 3): Basic earnings per share $ 0.24 $ 0.20 ========= ========= Average common shares outstanding 6,096,244 6,104,910 ========= ========= Diluted earnings per share $ 0.23 $ 0.20 ========= ========= Diluted average common shares and share equivalents 6,216,274 6,148,794 ========= ========= 4 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three Months Ended June 30, 2001 2000 ----------- ---------- (thousands) Interest Income Interest and fees on loans $ 9,540 $ 6,863 Interest on investment securities held to maturity 104 149 Interest on investment securities available for sale 460 525 Interest on federal funds sold 12 84 Interest on interest bearing deposits - 34 ---------- ---------- Total interest income 10,116 7,655 Interest Expense Interest on deposits 4,513 3,062 Interest on repurchases and federal funds purchased 173 113 Interest on short-term borrowings 329 169 ---------- ---------- Total interest expense 5,015 3,344 ---------- ---------- Net interest income 5,101 4,311 Provision for Loan Losses 500 300 ---------- ---------- Net interest income after provision for loan losses 4,601 4,011 Non-interest Income Service charges 654 544 Other fees and charges 783 236 ---------- ---------- Total non-interest income 1,437 780 ---------- ---------- Non-interest Expense Salaries and employee benefits 2,564 2,105 Occupancy and equipment expenses 739 518 Other operating expenses 1,430 1,135 ---------- ---------- Total non-interest expense 4,733 3,758 ---------- ---------- Income before income taxes 1,305 1,033 Income taxes 462 359 ---------- ---------- NET INCOME $ 843 $ 674 ========== ========== Earnings Per Share (Note 3): Basic earnings per share $ 0.14 $ 0.11 ========== ========== Average common shares outstanding 6,097,474 6,102,462 ========== ========== Diluted earnings per share $ 0.14 $ 0.11 ========== ========== Diluted average common shares and share equivalents 6,233,770 6,137,181 ========== ========== 5 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2001 2000 ----------- ------------ (thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,453 $ 1,244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 819 546 Provision for loan loss 900 600 Investment securities (accretion) amortization, net (5) 17 Non-cash compensation 14 29 Changes in assets and liabilities: Other assets 251 (469) Other liabilities 942 132 ---------- ---------- Net cash provided by operating activities 4,374 2,099 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities available for sale (27,511) - Proceeds from maturities of securities available for sale 18,358 1,467 Proceeds from maturities of securities held to maturity 3 309 Proceeds from called securities available for sale 10,000 512 Proceeds from called securities held to maturity 1,242 118 Net increase in loans (87,020) (47,113) Purchases of premises and equipment, net (2,577) (4,760) Branches acquired from Republic Bank 43,211 - ---------- ---------- Net cash used in investing activities (44,294) (49,467) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits 59,424 41,101 Securities sold under repurchase agreements and federal funds purchased (9,641) (4,311) Short term borrowings (5,000) 15,000 Cash dividends paid (610) (612) Repurchase of common stock - (281) Exercise of options - 89 ---------- ---------- Net cash provided by financing activities 44,173 50,986 ---------- ---------- Increase in cash and cash equivalents 4,253 3,618 Cash and cash equivalents at beginning of period 20,898 17,520 ---------- ---------- Cash and cash equivalents at end of period $ 25,151 $ 21,138 ========== ========== SUPPLEMENTAL DISCLOSURES: Interest paid $ 8,799 $ 5,684 ========== ========== Taxes paid $ 886 $ 1,044 ========== ========== 6 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 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 six months ended June 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 weighted average number of shares of common stock 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 June 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 six months period ending June 30, 2001 and 2000. Six Months Three Months Ended June 30, Ended June 30, 2001 2000 2001 2000 -------- ------ ------- ------ Net Income $ 1,453 $ 1,244 $ 843 $ 674 Other Comprehensive Income (Loss), Net of Tax Unrealized Gains (Losses) on Securities: Unrealized Gains (Losses) on Securities Arising During the Period 416 33 61 (20) Less: Reclassification Adjustment (3) 11 (1) 4 -------- -------- ------- ------- Total Unrealized Gains (Losses), Net of Tax Recognized in Other Comprehensive Income 419 22 62 (24) -------- -------- ------- ------- Comprehensive Income, Net of Tax $ 1,872 $ 1,266 $ 905 $ 650 ======== ======== ======= ======= 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 poolings-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 six months ended June 30, 2001, the Company recorded goodwill amortization expense of $35,000. 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. 8 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY Selected Financial Data Six Months Ended June 30, 2001 2000 ------------ ------------- Dollars in thousands except per share information. --------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS: Total interest income $ 19,671 $ 14,600 Total interest expense (9,868) (6,195) ---------- ---------- Net interest income 9,803 8,405 Provision for loan losses (900) (600) ----------- ---------- Net interest income after Provision for loan losses 8,903 7,805 Non-interest income 2,456 1,551 Non-interest expense (9,121) (7,455) ----------- ---------- Income before taxes 2,238 1,901 Income taxes (785) (657) ----------- ---------- Net income $ 1,453 $ 1,244 =========== ========== --------------------------------------------------------------------------------------------------------- PER COMMON SHARE: Basic earnings $ 0.24 $ 0.20 Diluted earnings 0.23 0.20 Book value 7.53 7.13 Dividends 0.10 0.10 Actual shares outstanding 6,099,376 6,106,300 Weighted average shares outstanding 6,096,244 6,104,910 Diluted weighted average shares outstanding 6,216,274 6,148,794 --------------------------------------------------------------------------------------------------------- KEY RATIOS: Return on average assets 0.57% 0.67% Return on average shareholders' equity 6.47 5.78 Dividend payout 41.67 50.00 Efficiency ratio 74.40 74.88 Total risk-based capital ratio 9.24 14.89 Average shareholders' equity to average assets 8.89 11.51 Tier 1 leverage 7.31 11.08 --------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION AT PERIOD-END: Assets $ 576,959 $ 398,489 Loans 480,065 313,127 Deposits 489,476 329,304 Shareholders' equity 45,911 43,566 --------------------------------------------------------------------------------------------------------- 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 six months ended June 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 earnings for the six month period ended June 30, 2001 were $1.5 million, or $0.23 per diluted share, compared to $1.2 million, or $0.20 per diluted share, in the first half of 2000. Net income for the three month period ended June 30, 2001 was $843,000, or $0.14 per diluted share, compared to $674,000, or $0.11 per diluted share, for the comparable period in 2000. These results reflect growth in net interest income and in non- interest income. Non-interest expenses continue to reflect the Company's strategy to expand the CNB franchise into new markets. Included in results for a portion of the first half 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 a major component of the Company's net income and 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 for the first half of 2001 was $9.8 million, compared to $8.4 million in the first half of 2000, an increase of 17%. Loan growth continued to fuel the increases in interest income which rose 32%, or $2.5 million, and 35%, or $5.1 million, for the three and six month periods in 2001, respectively, compared to the same periods in 2000. Partially offsetting these increases, interest expense rose 50% and 59% in the 2001 second quarter and first half, respectively, from the comparable 2000 periods. This increase reflects the Company's greater reliance on higher cost deposits and short-term borrowings to meet loan demand and mitigated the positive impact of loan growth on net interest income. Net interest margin declined to 4.25% from 4.94% reflecting the increase in borrowing costs necessary to fund loan growth. Total earning asset yields decreased to 8.53% in 2001 from 8.59%, and rates on interest-bearing liabilities increased to 4.96% from 4.42% in 2000. The decline in earning asset yields is reflective of a drop in interest rates of 275 basis points during the first half of 2001. The higher rate on interest bearing liabilities is due to the Company's increased reliance on higher-cost short term borrowings to meet loan demand. Table 1: "Average Balances - Yields and Rates" provides the Company's average volume of interest earning assets and interest bearing liabilities for the first half of 2001 and 2000. Table 1a: "Analysis of Changes in Interest Income and Expense" indicates that the increase in net interest income was due mainly to volume increases in the loan portfolio, while the increase in interest expense was due to higher time deposit volumes and rates as well as higher balances of short-term borrowings. 10 Table 1: Average Balances - Yields and Rates (Unaudited) Six Months Ended June 30, 2001 Six Months Ended June 30, 2000 ------------------------------------- ---------------------------------- Interest Interest Average Income or Average Average Income or Average Balance Expense Rate Balance Expense Rate --------- ----------- ---------- --------- ----------- --------- (dollars in thousands) ASSETS: Federal funds sold $ 1,154 $ 28 4.89% $ 5,417 $ 160 5.92% Investment securities available for sale 33,128 979 5.96 33,549 1,061 6.34 Investment securities held to maturity 7,039 215 6.16 10,438 297 5.71 Loans (1) 423,274 18,447 8.79 290,303 13,042 9.01 Interest bearing deposits 213 2 1.90 1,276 40 6.29 ------- ------ ------ ------- ------- ------ TOTAL EARNING ASSETS 464,808 19,671 8.53 340,983 14,600 8.59 All other assets 44,822 34,607 ------- ------- TOTAL ASSETS $ 509,630 $ 375,590 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY: NOW and money markets $ 128,930 $ 1,940 3.03% $ 106,850 $ 1,714 3.16% Savings 17,535 109 1.25 17,594 122 1.39 Time deposits 208,841 6,594 6.37 144,489 4,000 5.55 Repurchases and federal funds purchased 14,918 359 4.85 6,950 190 5.48 Short term borrowings 31,077 866 5.62 5,275 169 6.43 ------- ------ ------ ------- ------ ------ TOTAL INTEREST BEARING LIABILITIES 401,301 9,868 4.96 281,158 6,195 4.42 Demand deposits 57,351 47,744 Other liabilities 5,676 3,442 Shareholders' equity 45,302 43,246 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 509,630 $ 375,590 ======= ======= ------ ------ INTEREST SPREAD (2) 3.57% 4.17% ====== ====== ------ ------ NET INTEREST INCOME $ 9,803 $ 8,405 ====== ====== NET INTEREST MARGIN (3) 4.25% 4.94% ====== ========= -------------------------------------------------------(1) Interest income on average loans includes loan fee recognition of $726,000 and $517,000 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 JUNE 30, NET CHANGE JUNE 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 $ (125) $ (7) $ (132) $ (251) $ 35 $ (216) Investment securities available for sale (13) (69) (82) (522) 104 (418) Investment securities held to maturity (96) 14 (82) 80 15 95 Loans 5,941 (536) 5,405 4,024 (9) 4,015 Interest bearing deposits (33) (5) (38) (237) 10 (227) ------ ------- ------- -------- ----- ----- Total 5,674 (603) 5,071 3,094 155 3,249 ------ ------- ------- -------- ----- ----- INTEREST EXPENSE: NOW and money markets 346 (120) 226 307 633 940 Savings - (13) (13) 2 (4) (2) Time deposits 1,771 823 2,594 327 281 608 Repurchases and federal funds purchased 217 (48) 169 22 41 63 Short term borrowings 823 (126) 697 - 169 169 ------ ------- ------- -------- ----- ----- Total 3,157 516 3,673 658 1,120 1,778 ------ ------- ------- -------- ----- ----- Net interest income $ 2,517 $ (1,119) $ 1,398 $ 2,436 $ (965) $ 1,471 ====== ======= ======= ======== ====== =====(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, 2001 increased $657,000, or 84% and $905,000, or 58%, respectively, for the comparable periods in 2000. The increase was primarily attributed to growth in mortgage loan originations and the increased deposit base. Service charges on deposit accounts increased $159,000, or 15% for the first half of 2001 compared to the same period in 2000. Other fee income, which includes credit card fees, credit life insurance income, safe deposit box fees, fees from loans sold in the secondary market, net gains and losses from sale of securities and other miscellaneous fees, had an increase of $746,000, or 152% for the first six months of 2001 compared to the comparable 2000 period. Non-interest income, annualized, as a percentage of average assets was 0.97% for the six months ended June 30, 2001, compared to 0.83% for the comparable period in 2000. Non-Interest Expense Non-interest expenses were $4.7 million and $9.1 million for the three and six month periods ended June 30, 2001 compared to $3.8 million and $7.5 million for the respective 2000 periods, an increase of 26% and 22%, respectively. Non-interest expenses reflect the increased costs resulting from the opening of the Mandarin Branch in Jacksonville during the first half of 2001, the relocation during 2000 into new facilities for CNB in Jacksonville and Gainesville, operating expenses from the Company's new data processing platform 12 converted in late 2000, expansion of the Lake City Operations Center and increased commissions resulting from mortgage originations. Non- interest expense, annualized, as a percentage of average assets for the six month period ending June 30, 2001 and 2000 was 3.61% and 3.99%, respectively. Salaries and employee benefits increased $818,000 or 20% to $5.0 million for the first half of 2001, compared to $4.2 million for the same period in 2000. This increase reflects implementation of the Company's business plan to build an organization structure supporting expansion in the First Coast and Gainesville markets and increased commissions resulting from mortgage originations. Average full-time equivalent employees increased by 31 during the first half of 2001 as compared to the same period in 2000. Occupancy expense (including premises, furniture, fixtures and equipment) increased $221,000, or 43% and $378,000, or 37%, respectively, over the comparable three and six month periods in 2000. The increase is primarily attributable to costs associated with the additional branches, relocation during 2000 into new facilities for CNB in Jacksonville and Gainesville and expansion of the CNB Operations Center in Lake City. During the first half of 2001, the Bank opened two new branches, one in the Mandarin area of Jacksonville and another in St. Augustine. 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 $470,000, or 21%, in the first half 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 Six Months Ended June 30, 2001 2000 ------------ ------------ (thousands) Data processing $ 492 $ 322 Postage and delivery 290 268 Supplies 289 205 Advertising and promotion 281 305 Telephone 269 271 Legal and professional 220 228 Amortization of intangible assets 141 90 Loan expenses 131 85 Administrative 99 109 Regulatory fees 86 71 Insurance and bonding 70 39 Dues and subscriptions 45 52 Education expense 41 38 Directors fees 38 32 Other general operating 28 89 Other 228 74 ------ ------ Total other operating expenses $2,748 $2,278 ====== ====== 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 2001 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 13 and demands for funds on a daily and weekly basis. 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 $54.4 million and represented 13% of average total deposits during the first half of 2001, compared to $55.7 million and 18% for 2000. Average loans were 103% and 92% of average deposits for the six month period ended June 30, 2001 and 2000, 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, 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. The Company is also a member of the FHLB and has access to short-term and long-term funds. Outstanding borrowings at June 30, 2001 with the FHLB and other financial institutions were $20.0 million and $5.0 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 by maturity, 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 June 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 June 30, 2001 (dollars in thousands) Fair 1 Year 2 Years 3 Years 4 Years 5 Years Beyond TOTAL Value ------ ------- ------- ------- ------- ------ ----- ----- INTEREST-EARNING ASSETS: Loans Fixed rate loans $ 31,641 $ 29,785 $ 33,830 $ 29,112 $ 25,097 $ 87,975 $ 237,440 $ 237,137 Average interest rate 8.79% 8.96% 8.84% 8.76% 8.94% 8.14% 8.59% Variable rate loans 50,634 32,189 24,840 11,882 17,515 105,565 242,625 242,625 Average interest rate 7.36% 7.26% 7.54% 7.78% 7.51% 8.09% 7.71% Investment securities (1) Fixed rate investments 4,604 90 17,900 4,337 6,213 758 33,902 34,384 Average interest rate 5.04% 4.10% 5.64% 5.31% 6.15% 5.40% 5.60% Variable rate investments - - - - - 1,337 1,337 1,354 Average interest rate 6.73% 6.73% Federal funds sold 475 - - - - - 475 475 Average interest rate 4.90% 4.90% Other earning assets (2) 3,943 - - - - - 3,943 4,059 Average interest rate 6.12% 6.12% ------- -------- ------- -------- ------- -------- -------- -------- Total interest-earning assets $ 91,297 $ 62,064 $ 76,570 $ 45,331 $ 48,825 $ 195,635 $ 519,722 $ 520,034 Average interest rate 7.67% 8.07% 7.67% 8.17% 8.07% 8.09% 7.96% ======= ======== ======= ======== ======= ======== ======= ======== INTEREST-BEARING LIABILITIES: NOW $ 38,372 $ - $ - $ - $ - $ 56,570 $ 94,942 $ 94,942 Average interest rate 3.16% 1.00% 1.87% Money market (3) 51,548 - - - - 7,624 59,172 59,172 Average interest rate 4.24% 3.12% 4.10% Savings - - - - - 19,526 19,526 19,526 Average interest rate 1.01% 1.01% CD's $100,000 and over 92,783 5,836 988 308 114 - 100,029 99,442 Average interest rate 6.07% 6.31% 6.11% 6.42% 6.55% 6.09% CD's under $100,000 131,788 12,356 2,543 1,009 591 - 148,287 147,420 Average interest rate 5.75% 5.51% 5.58% 5.76% 6.05% 5.73% Securities sold under repurchase agreements 11,501 - - - - - 11,501 11,501 Average interest rate 3.77% 3.77% Short term borrowings 25,000 - - - - - 25,000 25,000 Average interest rate 4.38% 4.38% ------- -------- ------- -------- ------- -------- -------- -------- Total interest-bearing liabilities $350,992 $ 18,192 $ 3,531 $ 1,317 $ 705 $ 83,720 $ 458,457 $ 457,003 Average interest rate 5.17% 5.77% 5.73% 5.91% 6.13% 1.20% 4.48% ======= ======== ======= ======== ======= ======== ======== ========(1) Securities available for sale are shown at their amortized cost, excluding market value adjustment for unrealized gains of $615,000. (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 80% of total deposits at June 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 11, 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 June 30, 2001 (dollars in thousands) Amount Three months or less $ 20,783 Three through six months 28,274 Six through twelve months 43,726 Over twelve months 7,246 ------- Total $100,029 ======= EARNING ASSETS Loans During the first half of 2001, average loans were $423.3 million and were 103% of average deposits, compared to $290.3 million and 92% for 2000. Total loans have increased by $99.2 million, or 26%, 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 first half of 2001, compared to 85% for the first half of 2000. The following table reflects the composition of the Company's loan portfolio as of June 30, 2001 compared to December 31, 2000. Table 5: Loan Portfolio Composition June 30, December 31, 2001 2000 ----------- ------------ (thousands) Commercial, financial and agricultural $ 238,986 $ 192,540 Real estate - mortgage 155,218 120,663 Real estate - construction 46,919 33,648 Installment and consumer 38,942 33,970 -------- -------- Total loans, net of unearned income 480,065 380,821 Less: allowance for loan losses (4,558) (3,670) -------- -------- Net loans $ 475,507 $ 377,151 ======== ======== The following table sets forth the maturity distribution for selected components of the Company's loan portfolio on June 30, 2001. Demand loans and overdrafts are reported as due in one year or less, and loan maturity is based upon scheduled principal payments. 16 Table 6: Maturity Schedule of Selected Loans June 30, 2001 0-12 1-5 Over 5 Months Years Years Total -------- --------- ---------- --------- (thousands) Commercial, financial and agricultural $ 46,677 $ 101,792 $ 90,517 $ 238,986 Real estate - construction 19,128 27,791 - 46,919 All other loans 16,470 74,667 103,023 194,160 ------- ------- ------- ------- Total $ 82,275 $ 204,250 $ 193,540 $ 480,065 ======= ======= ======= ======= Fixed interest rate $ 31,641 $ 117,824 $ 87,975 $ 237,440 Variable interest rate $ 50,634 $ 86,426 $ 105,565 $ 242,625 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 in geographic as well as in types of loans funded. The Bank's three largest concentration categories are: Land Development, Commercial Real Estate and Professional. Loan Quality The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on past dues and other loans that management believes require attention. The provision for loan losses is a charge to earnings in the current period to maintain the allowance for loan losses at an adequate level. Loans are charged against the allowance when it is recognized that collection of the principal is unlikely. Management considers the allowance appropriate and adequate to cover potential losses inherent in the loan portfolio; however, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove to be valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. The allowance for loan losses on June 30, 2001, was 0.95% of total loans, compared to 1.02% at June 30, 2000. 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, 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 $ 2,915 50% $ 2,607 50% Real estate - mortgage 463 32% 293 32% Real estate- construction 25 10% 15 9% Consumer 1,064 8% 734 9% Unallocated 91 - 21 - ------- ------ ------- ------ Total $ 4,558 100% $ 3,670 100% ======= ====== ======= ====== 17 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 increased $600,000 from December 31, 2000 to $2.1 million. Non-performing assets as a percentage of total assets increased to 0.36% on June 30, 2001 from 0.32% on December 31, 2000. Table 8: Non-Performing Assets June 30, December 31, 2001 2000 ---------- ----------- (dollars in thousands) Non-accrual loans $ 1,048 $ 579 Past due loans 90 days or more and still accruing 1,006 840 Other real estate owned and repossessions 20 56 ------ ------ Total non-performing assets $ 2,074 $ 1,475 ====== ====== Percent of total assets 0.36% 0.32% Table 9: Activity in Allowance for Loan Losses June 30, 2001 2000 ---------- ---------- (dollars in thousands) Allowance for loan loss balance applicable to: Balance at beginning of year $ 3,670 $ 2,671 Allowance acquired by acquisition 110 - Loans charged-off: Commercial, financial and agricultural 50 15 Real estate, mortgage 34 11 Real estate, construction - - Consumer 174 159 --------- --------- Total loans charged-off (258) (185) Recoveries on loans previously charged-off: Commercial, financial and agricultural 48 24 Real estate, mortgage 21 - Real estate, construction - - Consumer 67 91 --------- --------- Total loan recoveries 136 115 --------- --------- Net loans charged-off (122) (70) --------- --------- Provision for loan losses charged to expense 900 600 --------- --------- Ending balance $ 4,558 $ 3,201 ========= ========= Total loans outstanding $ 480,065 $ 313,127 Average loans outstanding $ 423,274 $ 290,303 Allowance for loan losses to loans outstanding 0.95% 1.02% Net charge-offs to average loans outstanding, annualized 0.06% 0.05% 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 $39.3 million at June 30, 2001, a decrease of 3% from $40.7 million at the end of 2000. Securities are classified as either held-to-maturity or available-for-sale. Securities available-for-sale, which made up 84% of the total investment portfolio at June 30, 2001 had a value of $33.1 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 tax, as a separate component of shareholders' equity. At June 30, 2001, shareholders' equity included a net unrealized gain of $385,000, 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 in the United States. 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. The following tables set forth the maturity distribution and the weighted average yields of the Company's investment portfolio. 19 Table 10: Maturity Distribution of Investment Securities (1) June 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 $ 1,511 ----------- ------------- ----------- ----------- Total U.S. Treasury - - 1,500 1,511 U.S. Government Agencies and Corporations: One year or less - - 3,014 3,021 Over one through five years 6,213 6,205 22,000 22,425 ----------- ------------- ----------- ----------- Total U.S. Government Agencies 6,213 6,205 25,014 25,446 and Corporations Obligations of State and Political Subdivisions: One year or less - - 90 90 Over one through five years - - 327 331 Over ten years - - 608 642 ----------- ------------- ----------- ----------- Total Obligations of State and - - 1,025 1,063 Political Subdivisions Mortgage-Backed Securities (2): Over five through ten years - - 348 350 Over ten years - - 1,139 1,155 ----------- ------------- ----------- ----------- Total Mortgage-Backed Securities - - 1,487 1,505 Other Securities: Over ten years (3) - - 3,423 3,539 ----------- ------------- ----------- ----------- Total Other Securities - - 3,423 3,539 ----------- ------------- ----------- ----------- Total Securities $ 6,213 $ 6,205 $ 32,449 $ 33,064 =========== ============= =========== ===========(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 11: Weighted Average Yield by Range of Maturities June 30, 2001 December 31, 2000 June 30, 2000 ------------- ----------------- ------------- One Year or Less 5.16% 6.49% 6.26% More than One through Five Years 6.06% 6.00% 6.02% More than Five through Ten Years 5.80% 6.18% 6.17% More than Ten Years (1) 6.63% 6.45% 6.18%(1) Represents adjustable rate mortgage-backed securities which are repriceable within one year. 20 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, 2001 and December 31, 2000. Table 12: Total Deposits June 30, December 31, 2001 2000 ----------- ------------ (thousands) Non-interest bearing: Demand checking $ 67,520 $ 52,082 Interest bearing: NOW checking 94,942 74,589 Money market checking 59,172 38,797 Savings 19,526 16,479 Certificates of deposit 248,316 185,739 -------- -------- Total deposits $ 489,476 $ 367,686 ======== ======== CAPITAL RESOURCES Shareholders' equity at June 30, 2001 was $45.9 million, as compared to $44.6 million at December 31, 2000. During the first and second quarters of 2001, the Board of Directors declared dividends totaling $0.10 per share, consistent with 2000. At June 30, 2001, the Company's common stock had a book value of $7.53 per share compared to $7.32 per share at December 31, 2000. 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 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 June 30, 2001, the Bank met all capital adequacy requirements to which it is subject. 21 At June 30, 2001 and 2000, 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 2001 2000 Requirements Minimums ---------- ------------ ---------------- ---------- Risk Based Capital Ratios: Tier 1 Capital Ratio 8.3% 13.9% 6.0% 4.0% Total Capital to Risk-Weighted Assets 9.2% 14.9% 10.0% 8.0% Tier 1 Leverage Ratio 7.3% 11.1% 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 are held by the Company, but other financial instruments, which include investments, loans and deposit liabilities are included in the Company's balance sheet. The release requires quantitative and qualitative disclosures about market risk. 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 by maturity, separated by fixed and variable interest rates. The estimated fair value of each instrument category is also shown in the table. While these estimates of fair value are based on management's judgement of the most appropriate factors, there is no assurance that, were the Company to have disposed of such instruments at June 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 June 30, 2001 would not necessarily be considered to apply at subsequent dates. 22 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 - On May 16, 2001, the Company held its Annual Meeting of Shareholders, whereby the Board of Directors (Thomas R. Andrews, Audrey S. Bullard, Raymon Land, Sr., Marvin H. Pritchett, Halcyon E. Skinner, William Streicher and K. C. Trowell) all were re-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. 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 4,892,028 57,890 0 Audrey S. Bullard 4,892,028 57,890 0 Raymon Land, Sr. 4,892,028 57,890 0 Marvin H. Pritchett 4,892,028 57,890 0 Halcyon E. Skinner 4,892,028 57,890 0 William Streicher 4,892,028 57,890 0 K. C. Trowell 4,873,468 76,450 0 (b) The shareholders approved the proposal to amend the Company's Performance Based Incentive Plan. The amendment increases the number of shares which may be granted under the long-term incentive component of the Plan from 540,000 to 800,000. The number of votes cast were as follows: Against/ Abstentions/ For Withheld Broker Non-Votes --------- -------- ---------------- 4,823,116 125,312 1,490 Item 5. Other Information - Not applicable. Item 6. Exhibits and Reports on Form 8-K - (a) Exhibits: None (b) Reports on Form 8-K: None 23 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 9, 2001 24