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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO: 0-25988
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CNB FLORIDA BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-2958616
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
POST OFFICE BOX 3239
201 NORTH MARION STREET
LAKE CITY, FLORIDA
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 755-3240
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
Par value $0.01 per share.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
("NASDAQ") on March 1, 2000 was $35,713,608.
The number of shares of the Registrant's common stock outstanding as of
March 1, 2000 was 6,122,070 shares, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's 2000 Annual Meeting Proxy Statement is incorporated by
reference in this report in Part III, pursuant to Instruction G of Form 10-K,
except for the information relating to executive officers and key employees. The
Company will file its definitive Proxy Statement with the Commission prior to
April 15, 2000.
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PART I
BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS, WHICH
INVOLVE RISKS AND UNCERTAINTIES WHICH ARE DESCRIBED IN THIS ANNUAL REPORT AND IN
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). THE
ACTUAL RESULTS OF CNB FLORIDA BANCSHARES, INC. (THE "COMPANY" OR "CNB") MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH SELECTED
HISTORICAL FINANCIAL INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE COMPANY, WHICH ARE INCLUDED IN THIS FORM 10-K.
GENERAL
The Company is a one-bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), which commenced operations in
1987 by acquiring the capital stock of CNB National Bank (the "Bank"), which had
been formed in 1986. The Company is currently headquartered in Lake City,
Florida, but will relocate its headquarters to Jacksonville, Florida, during
2000 in connection with its expansion plans described below. The Bank is a
national banking association subject to the supervision of the Office of the
Comptroller of the Currency ("Comptroller"). It provides traditional deposit,
lending and mortgage products and services to its commercial and retail
customers through twelve full service branches located within the following
contiguous counties in Northeast Florida: Alachua, Baker, Bradford, Columbia,
Duval, Suwannee and Union County. At December 31, 1999, the Company had total
assets of $346.1 million, total loans of $266.1 million, total deposits of
$288.2 million, and total shareholders' equity of $43.1 million, reflecting
compound annual growth rates of 15.5%, 25.3%, 13.6% and 27.2%, respectively, for
the five-year period ended December 31, 1999. Net income for the years ended
December 31, 1999, 1998 and 1997 was $2.9 million, $2.7 million and
$3.0 million, respectively. For the five-year period ended December 31, 1999,
the compound annual earnings growth rate was 17.3%.
EVOLUTION OF THE FLORIDA BANKING MARKET
Significant changes in interstate banking and branching laws, enacted during
the early 1980s, have allowed bank holding companies to aggressively expand into
new markets that have attractive growth rates and demographics. As a result,
substantial consolidation of the Florida banking market has occurred. Management
believes Florida has been particularly attractive to regional bank holding
companies because it is the fourth largest state in the country in terms of
total population and is among the ten fastest growing states in the country. As
more out-of-state bank holding companies enter the Florida market, the Company
believes that the number of depository institutions headquartered and operating
in Florida will continue to decline.
The Company has observed a similar consolidation trend in the markets in and
around Gainesville and Jacksonville (the "Expansion Markets"), where it is
expanding. Historically the Company competed successfully in its Core Markets,
which consists of Columbia, Suwannee, Baker, Bradford and Union Counties,
against larger bank holding companies for middle market customers. In the
Company's Expansion Markets, many of such customers have preferred the banking
services and products of banks that are locally headquartered. Increasingly,
however, large regional bank holding companies are entering the Company's
Expansion Markets by acquiring such previously locally headquartered banks. For
example, in January 1998, NationsBank Corporation (now BankAmerica Corporation)
("BankAmerica") completed its acquisition of Jacksonville-based Barnett
Banks, Inc. ("Barnett"), which, prior to its acquisition, was the largest bank
headquartered in Florida. The acquisition of Barnett closely followed the
acquisition of three of Jacksonville's five community banks by SouthTrust Bank
Corporation ("SouthTrust") and Compass
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Bancshares, Inc. ("Compass") in 1996 and 1997. Similarly, Gainesville State
Bank, the largest community bank in Gainesville and the surrounding Alachua
County (the "Gainesville Market"), was acquired by Compass in 1997. As a result,
the Company now competes in its Core Markets, and will compete in its Expansion
Markets, primarily with SunTrust Banks, Inc., BankAmerica, First Union
Corporation, SouthTrust, AmSouth Bancorporation and Compass, all of which are
headquartered outside of Florida.
GROWTH OPPORTUNITY FOR THE COMPANY
Management believes that a significant segment of the historical customer
base of Barnett and those of other acquired community banks in Northeast
Florida, particularly individuals and small and medium-sized businesses, prefer
the personalized service that characterized their relationships with the locally
headquartered banks that were acquired. Many of these personal relationships
have been disrupted as the larger, regional financial institutions increasingly
focus on larger corporate customers, offer primarily standardized loan and
deposit products and services, and employ centralized management and more remote
decision-making. Thus, Company management believes there exists a unique
opportunity to address the under-served banking needs of individuals and small
and medium-sized businesses in its Expansion Markets, which are contiguous and
demographically similar to the Company's existing Core Markets. Accordingly, the
Company's current strategic focus is to immediately capitalize on this market
opportunity. In pursuing this opportunity, the Company will continue to focus on
that specific segment of the market to which it has historically appealed. The
Company believes that its historical strategy of providing personalized and
consistent service to its small and middle-market corporate customers and
individuals will allow it to continue to compete profitably, not only in the
markets that it presently serves but in other markets as well.
BUSINESS STRATEGY
The Company's primary goal is to enhance profitability and shareholder
returns through aggressive but sound growth. The Company's long-term strategy is
to (i) continue to grow its full service banking operations by expanding into
new markets, (ii) leverage current branch capacity, (iii) expand its mortgage,
consumer, and commercial lending activities and (iv) continue to differentiate
itself from its larger competitors by emphasizing personalized,
relationship-driven service provided by a locally-headquartered financial
institution.
EXPAND IN UNDER-SERVED MARKETS
The consolidation of the banking industry in Northeast Florida has created a
window of opportunity for the Company to expand its operations in the Expansion
Markets. The Expansion Markets are contiguous and culturally similar to the Core
Markets. Like the Core Markets, the Expansion Markets consist in large part of
individuals and small and medium-sized businesses. The Company believes that its
familiarity with meeting the banking needs and expectations of similar customers
in the Core Markets makes the Company particularly qualified to attract banking
customers accustomed to banking with community banks in the Expansion Markets.
The recent consolidation also has dislocated qualified banking professionals who
have strong ties to, and an understanding of, their local markets. The Company
believes that it has attracted and will continue to attract qualified banking
professionals, thereby benefiting from their experience and their ability in
many instances to bring with them the banking business of their loyal customers.
These factors, together with the Bank's asset size and its capital base,
position the Company to work more effectively with middle-market customers than
many smaller community banks in the Expansion Markets.
PROVIDE COMMUNITY BANKING SERVICE
The Company believes that it can achieve the goals outlined above through a
continued commitment to the "community bank philosophy", which emphasizes
offering a broad range of personalized products and services through banking
professionals who understand the banking industry and the banking needs of the
local communities they serve. Each branch manager and individual loan officer is
given a certain
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degree of authority and discretion to approve loans and to price loans and
services in order to respond quickly and efficiently to the needs of the
Company's customers. In implementing this strategy, the Company will combine the
experience and customer networks of its loan officers with centralized
information technology to effectively price and provide customized banking
services to enhance overall profitability. The Company intends to pursue this
strategy throughout its Core and Expansion Markets and operate a multi-office
community bank that emphasizes decision-making at the local level.
To ensure that the Company's proposed expansion does not erode its standards
for service and quality, the Company created three operating divisions: the
Southern Division, the Eastern Division and the Central Division. The Company
created a fourth division, the First Coast Division, when it moved into the
Jacksonville Market in 1999. This new organizational structure will help to
ensure that the Company's banking products and services are tailored to the
individual markets it serves, as opposed to the "one size fits all" approach
that generally is followed by larger financial institutions. The divisions are
headed by Division Presidents who effectively have the authority to operate the
division as a community bank, so long as it is done within the parameters of the
Company's policies. In addition, the Company is creating advisory boards in each
division composed of business leaders from that community.
DEPOSIT PRODUCTS AND SERVICES
The Company offers various deposit products and services to its retail and
commercial customers. These products include commercial and retail checking
accounts, specialized low-cost checking for customers who write few checks per
month, money market accounts for consumers and commercial customers, NOW
accounts and savings accounts. Additionally, the Company offers an
interest-bearing transaction account for seniors with no minimum balance
requirements, no service charge and no per-check charge. For customer
convenience and ease of storage, the Company offers image-based monthly account
statements, as well as an automated telephone banking service for balance
reporting. The Company's deposit services include cash management for commercial
customers for overnight investment, wire transfer services, collections, money
orders, safe deposit boxes and traveler's checks. The Bank is currently a member
of the STAR (formerly HONOR), PLUS and CIRRUS networks of automated teller
machines that may be used by Bank customers in major cities throughout the
United States. All deposits are insured by the FDIC up to the maximum amount
permitted by law (generally $100,000 per depositor subject to aggregation
rules).
LOAN PRODUCTS AND LENDING POLICY
IN GENERAL
The Company provides to customers a full range of short- to medium-term
commercial, agricultural, Small Business Administration ("SBA") guaranteed,
Farmers Home Administration guaranteed, long term residential mortgages and
personal loans, both secured and unsecured. Credit is extended consistent with a
comprehensive loan policy that governs advance rates, maturities and acceptable
collateral. The Company's loan policy grants lending authority based on a tiered
schedule, with significant authority at the Division President level. Exceptions
to the policy must be recommended by the applicable Division President, the
Credit Administrator and approved by either the President or the Chief Executive
Officer of the Bank before the credit commitment can be made. If the loan is for
an amount exceeding $1.5 million, the Executive Committee of the Bank's Board of
Directors must approve any exceptions to the Bank's loan policy.
COMMERCIAL LOANS
Commercial loan products include (I) short-term loans and lines of credit
for working capital purposes, which are generally secured by the borrower's
current assets (usually accounts receivables and inventory), (ii) intermediate
term loans for farm and non-farm equipment and crop loans and (iii) SBA
guaranteed loans. They include secured and unsecured loans for working capital,
business expansion and purchases of equipment and machinery.
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Lines of credit are subject to annual review and approval, generally not
later than 120 days after the closing of the customer's fiscal year end.
Advances are typically limited to 75.0% of eligible accounts receivable and up
to 50.0% on inventory. These credits are usually monitored through the review of
a receivables aging report and borrowing base report.
Term loans having maturities greater than one year are generally secured by
equipment or rolling stock with advances limited to no more than 75.0% of cost.
In virtually all cases, the Bank requires the personal guaranty of the owners or
major shareholders of the borrower.
Agricultural loans are granted to experienced farmers with demonstrated
capabilities, acceptable historical cash flows, reasonable cash flow projections
and adequate secondary sources of repayment.
COMMERCIAL REAL ESTATE LOANS
The Company's commercial real estate lending products include: construction
loans, mini-permanent and permanent financing for commercial properties,
acquisition and development loans for residential and commercial property
developers and investment property financing.
Construction loan borrowers are generally required to inject equity equal to
at least 20% of the total cost of the construction project before the Company
will advance funds on the loan. The Company advances funds pursuant to a draw
schedule and makes inspections prior to each draw request. The Company's
construction lending requirements also may include a plan and cost review,
depending on the complexity of the project. The plan and cost review and the
inspections are out-sourced by the Company to qualified professionals.
Mini-permanent and permanent financing loans are owner occupied projects
which demonstrate proven cash flows that result in a debt service coverage ratio
of at least 1.25 to 1, based on a twenty year amortization. Mini-permanent loan
amortization may be as long as twenty-five years, but normally requires balloon
maturities within five to eight years.
The Company extends acquisition and development loans to borrowers who have
historically fulfilled their financial obligations. The relevant acquisition or
development project must demonstrate acceptable absorption periods and should
have an equity investment of at least 25% of the total project costs. Such loans
typically mature within twenty-four months.
Loans on investment property are subject to the same underwriting criteria
as mini-permanent loans and include a threshold debt service coverage ratio of
at least 1.25 to 1.
RESIDENTIAL AND CONSUMER LOANS
Consumer lending products include open- and closed-ended home equity and
home improvement loans, automobile, boat, and recreational vehicle loans and
loans for other asset purchases. The Company offers Visa and MasterCard credit
and debit card products to consumers and commercial customers. Applications for
these products are evaluated based on the same credit requirements as direct
loans.
Loans to consumers are extended after a credit evaluation, including the
creditworthiness of the borrower, the purpose of the credit, and the secondary
source of repayment. Specifically, the lender reviews a credit bureau report for
the borrower's credit history and calculates a debt-to-income ratio based on the
borrower's gross monthly income to fixed debt payments. A ratio higher than
40.0% is generally considered unacceptable. For automobile loans, the policy
requires a minimum down payment of 10.0% with maturities based on the age of the
vehicle.
The Company offers a variety of one-to four-family residential loan
products, including residential construction loans and residential acquisition
financing.
Residential construction financing typically includes a construction loan
agreement with a construction draw schedule and third party inspections. A
commitment for permanent financing is required prior to
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closing. Typical residential construction loans mature within six to twelve
months. The Company offers a construction/permanent package loan product in
instances where the Company acts as the permanent lender.
Residential loans are originated for the Company's portfolio, as well as for
sale in the secondary market. The maximum loan amount is based on a loan to
value ratio of 80% or less, where the value is equal to the lesser of the cost
or the appraised value. A loan to value ratio of 95% is available when private
mortgage insurance can be obtained. The majority of these loans are originated
for sale in the secondary market and are sold on a servicing released basis. The
Company services loans originated for its portfolio.
LOAN REVIEW AND NONPERFORMING ASSETS
The Company's loan review officer, whose position is independent of the loan
production and administration process, has the responsibility to perform timely
reviews of credits within the portfolio with a review scope and assessment
criteria comparable to that of the Bank's regulators.
All new and renewed secured credits over $500,000 and unsecured credits over
$100,000 are reviewed within one week of approval. Additionally, a comprehensive
annual review is conducted on all credits over $250,000, past dues,
non-performing assets and other real estate owned. Smaller credits are reviewed
utilizing pre-determined standards, which include documentation and compliance,
by a person in loan operations, with exceptions referred to the loan review
officer. Problem credits, which include all non-performing assets, are reviewed
at least quarterly with written documentation which includes the reason for the
problem, collateral support, a plan for resolution of the problem and time
frames for the resolution. Delinquent loans are reviewed at least weekly and
monitored by the Board of Directors of the Bank in the monthly meetings.
A written report is developed on the findings of the various loan review
functions and reported directly to the Audit Committee of the Company's Board of
Directors, which meets quarterly. The allowance for loan losses is reviewed
monthly in order to make the appropriate loan loss provision based on the loan
review findings, delinquency, historical loan losses and current economic
trends.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability committee is comprised of selected senior
officers of the Bank who are charged with managing the assets and liabilities of
the Bank. The asset/liability committee manages asset growth, liquidity and
capital in order to maximize income and reduce interest rate risk. The
asset/liability committee directs the Bank's overall acquisition and allocation
of funds. At its quarterly meetings, the asset/liability committee reviews and
discusses peer group comparisons, the ratio of rate-sensitive assets to
rate-sensitive liabilities, the ratio of allowance for loan losses to
outstanding and nonperforming loans, and other variables, such as expected loan
demand, investment opportunities, core deposit growth within specified
categories, regulatory changes, monetary policy adjustments and the overall
state of the economy.
INVESTMENT POLICY
The Bank's investment portfolio policy is to maximize income consistent with
liquidity, asset quality, regulatory constraints and asset/liability objectives.
The policy is reviewed at least annually by the Bank's Board of Directors. The
Board of Directors is provided monthly information recapping purchases and sales
with the resulting gains or losses, average maturity, federal taxable equivalent
yields and appreciation or depreciation by investment categories.
The Bank invests primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States and
obligations of agencies of the United States. In addition, the Bank enters into
federal funds transactions with its principal correspondent banks.
Other investments include Independent Bankers Bank stock, Federal Reserve
Bank stock and Federal Home Loan Bank stock that are required for the Bank to be
a member of, and to conduct business with,
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such institutions. Dividends on such investments are determined by the
institutions and are payable semi-annually or quarterly.
COMPETITION
Within the Jacksonville, Gainesville and Core Markets in which CNB operates
(the "Markets"), there are competing financial institutions consisting primarily
of other commercial banks, savings and loan offices and credit unions. Certain
non-bank financial institutions affiliated with Florida banks or thrift
institutions offer limited financial services, including lending and deposit
gathering activities. The Bank also competes for deposits and loans with
brokerage firms, mobile home lenders, consumer finance companies, insurance
companies, mortgage banking companies, money market mutual funds and other
financial institutions.
In addition, the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Banking and Branching Act") has removed substantially
all state barriers to the acquisition of banks by out-of-state bank holding
companies. In addition, certain out-of-state bank holding companies have entered
the Florida banking market by acquiring failing thrift institutions and
commercial banks. Florida banks and bank holding companies also may enter the
Markets by acquiring a financial institution, by establishing de novo branches
or by forming de novo banks within the market.
Competition for deposit and loan business in the Markets will continue to be
intense because of existing competitors, the accelerating pace of product
deregulation and the likelihood of expansion into the Markets by other
institutions. Many of these institutions have significantly greater financial
resources than the Company. To compete, the Bank relies on specialized services,
responsive handling of customer needs, customer contact by Bank officers,
directors and staff, and the appeal of a locally-owned, relationship-driven
institution.
HISTORICAL GROWTH
The Bank has operated in Lake City, Columbia County, Florida since its
organization in 1986. In January 1987 the Company was formed as a bank holding
company to facilitate expansion opportunities. In 1988, the Company organized
Citizens Bank of Live Oak ("Citizens") and in November 1992 acquired an Anchor
Savings Bank ("Anchor") office in Macclenny. In 1990, the Bank opened its first
de novo branch in Fort White. In 1993, the Bank acquired additional banking
offices in Lake City and Live Oak from Anchor. The Company consummated its first
merger with another bank holding company on April 1, 1994, when Bradford
Bankshares ("Bradford") combined with the Company resulting in a branch in
Starke. On August 31, 1996, Riherd Bank Holding Company ("Riherd") merged with
the Company. The Riherd merger resulted in three additional offices for the
Bank, one of which is located in Lake Butler and two of which are in
Gainesville. Both the Bradford and the Riherd transactions were accounted for as
purchase transactions. In August 1997, the Bank opened its eleventh office,
located in Lake City, and in June 1999 expanded into Jacksonville with its
twelfth office.
EMPLOYEES
As of December 31, 1999, the Bank had 183 full-time equivalent employees.
The Company's operations are conducted through the Bank and, consequently, the
Company does not have any separate employees.
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SUPERVISION AND REGULATION
GENERAL
As a registered bank holding company, the Company is subject to the
supervision of, and regular inspection by, the Federal Reserve Board under the
BHC Act. The Bank is organized as a national banking association, which is
subject to regulation, supervision and examination by the Comptroller. The Bank
is also subject to regulation by the FDIC and other federal regulatory agencies.
In addition, the Company and the Bank are subject to various other laws and
regulations and supervision and examination by other regulatory agencies, all of
which directly or indirectly affect the operations and management of the Company
and the Bank and their ability to make distributions. The following discussion
summarizes certain aspects of those laws and regulations that affect the
Company.
The activities of the Company and the Bank are limited to banking, managing
or controlling banks, or any other activity which the Federal Reserve Board
determines to be so closely related to banking, managing or controlling banks as
to be a proper incident thereto. In making such determinations, the Federal
Reserve Board is required to consider whether the performance of such activities
by the Company or the Bank can reasonably be expected to produce benefits to the
public such as greater convenience, increased competition or gains in efficiency
that outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. Generally, the Company would be required to obtain prior
approval of the Federal Reserve Board to engage in any new activity or to
acquire more than 5% of any class of voting stock of any company or any bank
which is not already majority-owned by the Company.
Pursuant to the Interstate Banking and Branching Act, bank holding companies
are able to acquire banks in states other than their respective home states,
without regard to the permissibility of such acquisitions under state laws. The
transaction would still be subject to any state requirement that the Bank has
been organized and operating for a minimum period of time, not to exceed five
years, and the requirement that the respective bank holding company, prior to or
following the proposed acquisition, controls no more than ten percent (10%) of
the total amount of deposits of insured depository institutions in the United
States and less than thirty percent (30%) of such deposits in that state (or
such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. This provision, which
was effective June 1, 1997, allowed each state, prior to the effective date, the
opportunity to "opt out" of this provision, thereby prohibiting interstate
branching within that state. Florida did not "opt out" of the interstate
branching provisions of the Interstate Banking and Branching Act. Furthermore,
pursuant to the Interstate Banking and Branching Act, a bank is now able to open
new branches in a state in which it does not already have banking operations if
such state enacts a law permitting de novo branching.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on the Company
and the Bank cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve Board, the Comptroller and the FDIC have issued
substantially similar risk-based and leverage capital guidelines applicable to
United States banking organizations. In addition, those regulatory agencies may
from time to time require that a banking organization maintain capital above the
minimum levels, whether because of its financial condition or actual or
anticipated growth. The Federal Reserve Board risk-based guidelines define a
two-tier capital framework. Tier 1 capital consists of common and qualifying
preferred shareholders' equity, less certain intangibles and other adjustments.
Tier 2 capital consists of subordinated and other qualifying debt, and the
allowance for credit losses up to
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1.25% of risk-weighted assets. The sum of Tier 1 and Tier 2 capital less
investments in unconsolidated subsidiaries represents qualifying total capital,
at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios
are calculated by dividing Tier 1 and total capital by risk-weighted assets.
Assets and off-balance sheet exposures are assigned to one of four categories of
risk weights, based primarily on relative credit risk. The minimum Tier 1
capital ratio is 4% and the minimum total capital ratio is 8%. The Company's
Tier 1 and total risk-based capital ratios under these guidelines at
December 31, 1999, were 16.2% and 17.3%, respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. The Company's leverage ratio at December 31, 1999 was 12.7%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized), and requires
the respective federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee that bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of 5% of the bank's assets at the time
it became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors. In
addition, FDICIA requires the various regulatory agencies to prescribe certain
non-capital standards for safety and soundness related generally to operations
and management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of at least 8% and a
leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, the
Bank is considered well capitalized.
Banking agencies have also adopted regulations which mandate that regulators
take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. That
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have adopted final regulations
requiring regulators to consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance sheet position) in the determination of a bank's
capital adequacy. Concurrently, banking agencies have proposed a methodology for
evaluating interest rate risk. After gaining experience with the proposed
measurement process, those banking agencies intend to propose further
regulations to establish an explicit risk-based capital charge for interest rate
risk.
DISTRIBUTIONS
The Company's primary source of funds for cash distributions to its
shareholders is dividends received from the Bank. The Bank is subject to various
general regulatory policies and requirements relating to the
9
payment of dividends, including requirements to maintain capital above
regulatory minimums. The appropriate federal regulatory authority is authorized
to determine under certain circumstances relating to the financial condition of
the bank or bank holding company that the payment of dividends would be an
unsafe or unsound practice and to prohibit payment thereof.
In addition to the foregoing, the ability of the Company and the Bank to pay
dividends may be affected by the various minimum capital requirements and the
capital and non-capital standards established under FDICIA, as described above.
The right of the Company, its shareholders and its creditors to participate in
any distribution of the assets or earnings of the Bank is further subject to the
prior claims of creditors of the Bank.
"SOURCE OF STRENGTH" POLICY
According to Federal Reserve Board policy, the Company is expected to act as
a source of financial strength to the Bank and to commit resources to support
the Bank.
10
PROPERTIES
The Bank currently operates out of twelve branch offices and a non-customer
operations center. All branches, except one Gainesville branch, have ATMs. The
Company owns the following properties:
APPROXIMATE SQUARE YEAR ESTABLISHED/
OFFICE LOCATION FOOTAGE ACQUIRED
- ---------------------------------------------------- ------------------- -----------------
LAKE CITY (COLUMBIA)
201 North Marion Street (1)....................... 22,000 1986
145 West Baya Avenue.............................. 10,100 1993
4420 U.S. 90 West................................. 2,870 1997
1 CNB Place, East U.S. 90 (2)..................... 7,000 1996
LIVE OAK (SUWANNEE)
205 White Avenue, S.E............................. 6,000 1988
1562 South Ohio Avenue............................ 2,000 1993
FORT WHITE (COLUMBIA)
Highway 27........................................ 2,200 1990
MACCLENNEY (BAKER)
595 South Sixth Street............................ 4,800 1992
STARKE (BRADFORD)
606 West Madison Street........................... 8,000 1994
GAINESVILLE (ALACHUA)
5027 Northwest 34th Street........................ 2,000 1996
11411 North State Road 121........................ 4,500 1996
7515 West University Avenue (3)................... 14,000 2000
LAKE BUTLER (UNION)
300 West Main Street.............................. 6,750 1996
JACKSONVILLE (DUVAL)
9715 Gate Parkway North (4)....................... 26,000 2000
- ------------------------
(1) Main office.
(2) Houses the operations center including bookkeeping, proof and accounting.
(3) Scheduled to open in the second quarter of 2000.
(4) Scheduled to open in the summer of 2000.
The Company is currently leasing two properties in Jacksonville, Duval
County. The leases on these properties expire in the summer of 2000, and at that
time the Corporate Headquarters and the First Coast Division will relocate to
the new office located at 9715 Gate Parkway North, Jacksonville.
LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their property
the subject of, any material pending legal proceedings.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
11
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
K. C. Trowell 61 Mr. Trowell is Chairman and Chief Executive Officer of the
Company and the Bank. He was elected to the Board of
Directors in 1987 and serves as Chairman of the Executive
Committee of the Board of Directors of the Company and the
Bank. Mr. Trowell also serves on the Executive Committee of
the Bank's Board of Directors. He has served as the Chairman
and Chief Executive Officer of the Company since its
inception in 1987. Mr. Trowell is a Lake City, Florida,
native and has been actively involved in commercial banking
management in North Florida for over twenty-five years. He
has also held management positions with NationsBank of Lake
City (and its predecessors), American Bank of Jacksonville,
and Barnett Banks, Inc. in Jacksonville. He is a former
Chairman of the Board of Trustees of Florida Bankers
Insurance Trust. He is a past director of Community Bankers
of Florida, past director of the Columbia County Committee
of 100, a founding director of North Central Florida
Areawide Development Company, and a former board member and
chairman of both Lake City Medical Center and Columbia
County Industrial Development Authority.
G. Thomas Frankland 53 Mr. Frankland is the Executive Vice President and Chief
Financial Officer of the Company and the Bank.
Mr. Frankland served as Vice President and Chief Financial
Officer of AirNet Communications Corporation in Melbourne,
Florida, from March 1998 until he joined the Company in
November 1998. From May 1994 until August 1996,
Mr. Frankland was Vice Chairman and Chief Financial Officer
of Ideon Group, Inc. ("Ideon"). Following the acquisition
of Ideon by CUC International, Inc. ("CUC"), in
August 1996, Mr. Frankland continued in a consulting
capacity with CUC through December 1997. Prior to May 1994,
Mr. Frankland was a partner with Price Waterhouse LLP.
During his 24 years with Price Waterhouse LLP, including the
seven years he served as managing partner of the
Jacksonville office, he specialized primarily in the
financial services industry. He currently serves on the
Board of Directors of the University of Florida Foundation,
the Warrington College of Business Advisory Council and the
Fisher School of Accounting Steering Committee.
Bennett Brown 53 Mr. Brown is the Executive Vice President of the Company and
is the President and Chief Operating Officer of the Bank.
Mr. Brown joined the Company in April 1999. Mr. Brown's
background includes leading the formation of Enterprise
National Bank of Jacksonville as President and Chief
Executive Officer in 1987 until it was acquired by Compass
Bancshares in early 1997. He served as City President of
Compass Bank in Jacksonville until March 1999. Prior to
forming Enterprise Bank, Mr. Brown was with Florida National
Bank for 10 years and was previously a National Bank
Examiner with the Office of the Comptroller of the Currency
for 7 years. Mr. Brown is a graduate of the University of
South Carolina with a major in Banking and Finance. He
currently is a member of the Downtown Jacksonville Rotary
Club, and a member of the Board of Trustees for Wolfson
Children's Hospital in Jacksonville.
12
Joyce A. Bruner 47 Ms. Bruner has served, since the opening of the Bank in
1986, as Vice President, Cashier, Senior Operations Officer,
Senior Vice President and Senior Administrative Officer, and
currently, Executive Vice President. She also serves as
Secretary of the Company. Prior to joining the Bank during
its organizational phase, Ms. Bruner served as Operations
Officer for NationsBank of Lake City (and its predecessors)
for a period of three years where she had responsibility for
branch operations. Ms. Bruner has 23 years of banking
experience.
Martha S. Tucker 49 Ms. Tucker has served as Senior Vice President and
Controller of the Company and the Bank since July, 1997.
From 1991 through 1997, Ms. Tucker was Vice President and
Cashier of the Bank. From 1988 through 1991, Ms. Tucker was
Cashier for Citizens Bank of Live Oak, which merged into the
Bank in November 1992. From 1986 to 1988, Ms. Tucker served
as Assistant Cashier for the Bank and prior to 1986 held
management positions with NationsBank of Live Oak (and its
predecessors). Ms. Tucker is a life-long resident of Live
Oak, Florida and has over 32 years of banking experience.
She is a member of the Altrusa Club and the Suwannee County
Chamber of Commerce. In addition, Ms. Tucker volunteers for
Hospice of North Florida.
Lloyd D. Adams 52 Mr. Adams serves as the Central Division President of the
Bank. Prior to joining the Company in May 1998, Mr. Adams
served as the Executive Vice President/Senior Corporate
Banker for Barnett Bank, North Central Florida from
November 1996 until January 1998. He served as Senior Credit
Policy Officer with Barnett from 1992 through 1996. A native
of the area, Mr. Adams has deep roots as a community banker
in this Central Division. Mr. Adams has a strong background
in retail and business banking and credit policy, from both
a small community bank and large corporate bank perspective.
He is a graduate of Florida State University, Florida School
of Banking and the ABA Commercial Lending Graduate School in
Norman, OK. He has been in the banking industry for
25 years.
Robert E. Cameron 55 Mr. Cameron serves as the Southern Division President of the
Bank. Prior to joining the Company in April 1998,
Mr. Cameron was a Senior Vice President of Barnett Bank of
Alachua County from 1988 until 1998. He also was a member of
the Board of Directors of United Gainesville Community
Development Board. He has worked in the banking industry for
31 years. Currently he is a member of the Board of Directors
of the Gainesville Builders Association and Child Care
Resources and a member of the City of Gainesville
Development Review Board.
John D. Kennedy 43 Mr. Kennedy has served as the Eastern Division President of
the Bank since August 1998. From 1996 through 1998,
Mr. Kennedy was the President of the Bank's Macclenny
branch. From October 1973 until August 1996 he was with The
Citizens Bank of Macclenny, where he served as President
beginning in January 1987. He is a member of the Board of
Directors of Baker County Hospital Authority, Baker County
Council on Aging and Baker County Tip-Off Club. He is also
Chairman of the Baker County Education Foundation, President
of the Girls Softball League of Baker County and on the
Advisory Committee of the Baker County State Housing
Initiative Partnership ("SHIP") Program. Mr. Kennedy has
27 years of banking experience.
13
Suzanne M. Norris 36 Ms. Norris has served as Senior Vice President and Senior
Credit Administrator since July, 1997. Ms. Norris came to
the Bank in September, 1996 and has 13 years of banking
experience, working in various management and lending
positions with NationsBank in St. Petersburg, Tampa and Lake
City, including acting as commercial market manager/ senior
banking executive for Lake City and Gainesville from June,
1995 to September, 1996. Ms. Norris, a graduate of the
University of Florida, has been active in the community,
having served as the President of the Lake City/Columbia
County Chamber of Commerce. She currently serves on the
Board of Trustees for Lake City Community College, the Board
of Directors for the United Way of Suwannee Valley and
Epiphany Catholic School and is a member of Altrusa.
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock. As of March 17, 2000, there were 6,115,270
shares of Common Stock issued and outstanding, and 285,548 shares subject to
currently exercisable options. On January 29, 1999, the Company's common stock
began trading on the NASDAQ National Market under the symbol "CNBB", resulting
from the issuance of 1,250,000 shares of common stock in the Company's initial
public offering at $10.25 per common share. Proceeds from the offering net of
underwriting discount and expenses totaled $11.4 million. The Company
contributed $10.0 million of the $11.4 million net proceeds from the offering to
CNB National Bank in February 1999. There is no trading information for any
prior years, since there was not an established market for the Company's common
stock. See TABLE 12: "Selected Quarterly Data" in Management's Discussion and
Analysis of Financial Condition for the quarterly market price for the last
fiscal year.
Shareholders' equity at December 31, 1999 was $43.1 million, as compared to
$30.9 million at December 31, 1998. On July 15, 1998, the Company declared a
two-for-one stock split for shareholders of record on August 10, 1998, effective
August 17, 1998.
Company dividends for 1999 consisted of the payment of quarterly cash
dividends in the amount of $0.05 per common share on February 5, May 5,
August 5 and November 5, 1999. The Company also paid $0.20 total dividends in
1998.
The Company's ability to pay dividends on the Common Stock depends
significantly on the ability of the Bank to pay dividends to the Company in
amounts sufficient to service its obligations. Such obligations may include an
obligation to make any payments with respect to securities issued in the future
which have an equal or greater dividend preference to the Common Stock. The Bank
may also issue additional capital stock or incur indebtedness. Furthermore, the
regulations of the Comptroller, regulatory capital levels and the net income of
the Bank determine its ability to pay dividends or make other capital
distributions.
14
CNB FLORIDA BANCSHARES INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
`
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION.
SUMMARY OF OPERATIONS:
Interest Income.................... $ 23,758 $ 21,119 $ 19,420 $ 15,090 $ 12,745
Interest Expense................... (9,052) (9,417) (8,663) (6,612) (5,966)
---------- ---------- ---------- ---------- ----------
Net Interest Income................ 14,706 11,702 10,757 8,478 6,779
Provision for Loan Loss............ (1,160) (710) (440) (335) (230)
---------- ---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses.................. 13,546 10,992 10,317 8,143 6,549
Non-Interest Income................ 2,952 2,392 2,153 1,777 1,478
Non-Interest Expense............... (11,994) (9,298) (7,914) (6,360) (5,172)
---------- ---------- ---------- ---------- ----------
Income Before Taxes................ 4,504 4,086 4,556 3,560 2,855
Income Taxes....................... (1,563) (1,407) (1,581) (1,247) (1,014)
---------- ---------- ---------- ---------- ----------
Net Income......................... $ 2,941 $ 2,679 $ 2,975 $ 2,313 $ 1,841
========== ========== ========== ========== ==========
PER COMMON SHARE: (1)
Basic Earnings..................... $ 0.49 $ 0.55 $ 0.69 $ 0.67 $ 0.56
Diluted Earnings................... 0.48 0.55 0.68 0.65 0.55
Book Value......................... 7.04 6.36 5.98 5.08 4.50
Dividends.......................... 0.20 0.20 0.14 0.11 0.09
Actual Shares Outstanding.......... 6,116,070 4,856,770 4,856,770 3,875,810 3,279,466
Basic Weighted Average Shares
Outstanding...................... 5,995,474 4,856,770 4,327,534 3,478,248 3,279,466
Diluted Weighted Average Shares
Outstanding...................... 6,069,737 4,897,922 4,406,616 3,547,390 3,338,674
KEY RATIOS:
Return on Average Assets........... 0.91% 0.93% 1.14% 1.14% 1.06%
Return on Average Shareholders'
Equity........................... 7.03% 8.92% 12.38% 13.88% 13.24%
Dividend Payout.................... 40.82% 36.36% 20.29% 16.54% 16.07%
Efficiency Ratio................... 67.92% 65.97% 61.30% 62.02% 62.64%
Total Risk-Based Capital Ratio..... 17.25% 16.62% 18.67% 13.58% 14.90%
Average Shareholders' Equity to
Average Assets................... 13.01% 10.43% 9.22% 8.24% 7.99%
Tier 1 Capital to Total Assets/
Leverage Ratio................... 12.70% 9.70% 10.20% 7.25% 7.87%
FINANCIAL CONDITION AT YEAR END:
Assets............................. $346,076 $311,565 $273,331 $254,945 $176,733
Loans.............................. 266,084 187,015 159,649 148,824 102,349
Deposits........................... 288,203 265,109 231,444 226,824 159,003
Shareholders' Equity............... 43,075 30,896 29,025 19,669 14,754
OTHER DATA:
Banking Locations.................. 12 11 11 10 7
Full-Time Equivalent Employees..... 183 149 144 134 95
- ------------------------
(1) Per share data reflects the two-for-one stock split effective August 17,
1998.
15
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
periods shown. This section should be read in conjunction with the Consolidated
Financial Statements and related notes. This discussion should facilitate a
better understanding of the major factors and trends which affect the Company's
financial condition and earnings performance, and how the Company's performance
during 1999 compares with prior years. Throughout this section, CNB Florida
Bancshares, Inc. and its subsidiary, CNB National Bank are referred to as "CNB",
"the Company", or "the Bank."
On January 29, 1999, CNB completed its initial public offering and its
common stock began trading on the NASDAQ National Market. CNB shareholders now
have greater access to purchasing or selling shares of common stock and in
addition CNB obtained additional capital to support its expansion plans, as well
as for general corporate purposes. The Company contributed as capital to CNB
National Bank $10.0 million of the $11.4 million net proceeds from the offering
in February 1999.
In March 1999, the Company completed the acquisition of a site in
Jacksonville which will be utilized for its corporate offices and as
headquarters for the Bank's commercial banking activities in Jacksonville.
Construction should be completed on the 26,000 square foot building in the
summer of 2000. Construction also began in 1999 on CNB's new Gainesville
headquarters located on Tower Road, with completion scheduled for the second
quarter of 2000.
As approved by shareholders at the Company's 1999 annual meeting, CNB, Inc.
became CNB Florida Bancshares, Inc. on June 30, 1999. The new name better
reflects the nature of the Company's business and its geographic focus.
RESULTS OF OPERATIONS
In 1999, the Company's earnings were $2.9 million, or $0.49 per basic share,
compared to $2.7 million, or $0.55 per basic share, and $3.0 million, or $0.69
per basic share, in 1998 and 1997, respectively. Per share earnings for 1999
were adversely impacted by the Company's initial public offering completed in
the first quarter of 1999. The Company sold 1,250,000 shares raising
$11.4 million, net of underwriting discounts and expenses, to support its
expansion plans and for general corporate purposes. Weighted average shares
increased 23% in 1999 compared to 1998. Per share earnings for 1998 were also
adversely affected by the stock sale from the Rights Offering in July 1997,
which resulted in a 12% increase in the weighted shares outstanding from 1997 to
1998.
NET INTEREST INCOME/MARGINS
Net interest income is the single largest source of revenue of the Company
and is equal to interest and fee income generated by earning assets less
interest expense.
In 1999, net interest income increased $3.0 million, or 26%. This follows an
increase of $945,000 or 9%, in 1998, and $2.3 million, or 27% in 1997. The
increase in 1999 is mainly attributable to loan portfolio growth and related
increase in interest income from loans of $3.5 million. Also contributing to the
increase was a 4% decrease in interest expense resulting from an improved
interest rate mix, and an 18% increase in non-interest bearing deposits, while
total deposits grew 9%. The increase in net interest income for 1998 is
primarily the result of loan interest and fee income growth of $1.3 million,
investment income growth of $364,000, offset by an increase in interest expense
of $754,000.
The Company's net interest margin increased to 5.00% in 1999, compared to
4.43% and 4.52% in 1998 and 1997, respectively. The higher yield in 1999
reflects a more favorable earning asset mix as the
16
loan portfolio, which is the largest and highest yielding component of earning
assets, increased 42% from $187.0 million in 1998 to $266.1 million in 1999.
Table 1: "Average Balances--Yields and Rates", below, presents comparative
earning asset composition as well as earning asset yields and interest bearing
liabilities for 1999, 1998 and 1997. Table 1a: "Analysis of Changes in Interest
Income and Expense" shows the changes in net interest income by category due to
shifts in volumes and rates for years presented.
TABLE 1: AVERAGE BALANCES--YIELDS AND RATES
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- ------------------------------- -------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE AVERAGE INCOME OR AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- --------- -------- -------- --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Federal Funds Sold........ $ 13,285 $ 643 4.84% $ 32,583 $ 1,701 5.22% $ 13,480 $ 720 5.34%
Investment Securities
Available for Sale...... 45,082 2,671 5.92 47,675 2,869 6.01 58,442 3,560 6.09
Investment Securities Held
to Maturity............. 9,151 504 5.51 6,519 326 5.00 9,160 490 5.35
Loans (1)................. 215,861 19,412 8.99 171,048 15,877 9.28 155,168 14,542 9.37
Interest Bearing
Deposits................ 10,533 528 5.01 6,494 346 5.36 1,946 108 5.55
-------- ------- ---- -------- ------- ---- -------- ------- -----
TOTAL EARNING ASSETS........ 293,912 23,758 8.08 264,319 21,119 7.99 238,196 19,420 8.15
All Other Assets.......... 27,543 23,774 22,508
-------- -------- --------
TOTAL ASSETS................ $321,455 $288,093 $260,704
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets....... $ 80,132 1,749 2.18% $ 68,950 1,682 2.44% $ 62,465 1,555 2.49%
Savings................... 17,445 245 1.40 16,379 312 1.90 15,146 296 1.95
Time Deposits............. 131,548 6,731 5.12 129,157 7,057 5.46 119,545 6,404 5.36
Short Term Borrowings..... 6,854 322 4.70 7,233 359 4.96 4,738 239 5.04
Federal Funds Purchased... 93 5 5.40 -- -- -- -- --
Notes Payable &
Debentures.............. -- -- -- 85 7 8.00 2,100 169 8.05
-------- ------- ---- -------- ------- ---- -------- ------- -----
TOTAL INTEREST BEARING
LIABILITIES............... 236,072 9,052 3.83 221,804 9,417 4.25 203,994 8,663 4.25
Demand Deposits........... 40,761 33,161 30,246
Other Liabilities......... 2,813 3,086 2,434
Shareholders' Equity...... 41,809 30,042 24,030
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...... $321,455 $288,093 $260,704
======== ======== ========
---- ---- -----
INTEREST SPREAD (2)......... 4.25% 3.74% 3.90%
==== ==== =====
------- ------- -------
NET INTEREST INCOME......... $14,706 $11,702 $10,757
======= ======= =======
NET INTEREST MARGIN (3)..... 5.00% 4.43% 4.52%
==== ==== =====
- ------------------------------
(1) Interest income on average loans includes loan fee recognition of $697,000,
$572,000 and $531,000 in 1999, 1998 and 1997 respectively.
(2) Represents the average rate earned minus average rate paid.
(3) Represents net interest income divided by total earning assets.
17
TABLE 1A: ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
NET CHANGE DECEMBER 31, NET CHANGE DECEMBER 31,
1998-1999 ATTRIBUTABLE TO: 1997-1998 ATTRIBUTABLE TO:
-------------------------------- --------------------------------
NET NET
VOLUME (1) RATE (2) CHANGE VOLUME (1) RATE (2) CHANGE
---------- -------- -------- ---------- -------- --------
(THOUSANDS)
INTEREST INCOME:
Federal Funds Sold....................... $(1,007) $ (51) $(1,058) $ 1,020 $ (39) $ 981
Investment Securities Available for
Sale................................... (158) (40) (198) (656) (37) (693)
Investment Securities Held to Maturity... 132 46 178 (141) (23) (164)
Loans.................................... 4,160 (625) 3,535 1,488 (153) 1,335
Interest Bearing Deposits................ 218 (36) 182 253 (13) 240
------- ----- ------- ------- ----- -------
Total.................................. 3,345 (706) 2,639 1,964 (265) 1,699
INTEREST EXPENSE:
NOW & Money Markets...................... 273 (206) 67 161 (34) 127
Savings.................................. 20 (87) (67) 24 (8) 16
Time Deposits............................ 130 (456) (326) 515 138 653
Short Term Borrowings.................... (18) (19) (37) 124 (4) 120
Federal Funds Purchased.................. 5 -- 5 -- -- --
Notes Payable & Debentures............... (7) -- (7) (162) -- (162)
------- ----- ------- ------- ----- -------
Total.................................. 403 (768) (365) 662 92 754
------- ----- ------- ------- ----- -------
Net Interest Income.................. $ 2,942 $ 62 $ 3,004 $ 1,302 $(357) $ 945
======= ===== ======= ======= ===== =======
- ------------------------
(1) The volume variance reflects the change in the average balance outstanding
multiplied by the actual average rate during the prior period.
(2) The rate variance reflects the change in the actual average rate multiplied
by the average balance outstanding during the prior period. Changes which
are not solely due to volume changes or solely due to rate changes have been
attributed to rate changes.
NON-INTEREST INCOME
Non-interest income increased $560,000 or 23% in 1999, compared with
$239,000 or 11% in 1998 compared with 1997. Service charges on deposit accounts
increased $311,000 or 17% in 1999, compared to an increase of 4% in 1998. The
main contributing factor for the increase in 1999 was an increase in service
charge fees that went into effect March 1, 1999. Other fee income, which
includes credit card fees, credit life insurance income, safe deposit box fees,
net gains and losses from sale of securities and other miscellaneous fees had an
increase of $249,000 or 43% in 1999 and $162,000 or 39% in 1998. The main
contributing factors for the increase in 1999 were fees associated with ATM
surcharges coupled with mortgage servicing fees collected from the mortgage
loans sold to secondary markets. Non-interest income as a percentage of average
assets was 0.92% in 1999 compared to 0.83% and 0.83% in 1998 and 1997,
respectively.
NON-INTEREST EXPENSE
Non-interest expense increased by $2.7 million, or 29%, for the year ended
1999, as compared to increases of $1.4 million, or 18%, and $1.6 million, or
24%, for 1998 and 1997, respectively. At the end of 1999, non-interest expenses
as a percentage of average assets increased to 3.73%, as compared to 3.23% and
3.04% in 1998 and 1997, respectively. Salaries and employee benefits have
increased $1.6 million from 1998, compared to $859,000 from 1997. The increase
from 1998 to 1999 reflects the continued execution of
18
management's strategy to expand CNB into the Jacksonville and Gainesville
markets and the building of an infrastructure to support the expansion strategy.
In June 1999, the Bank opened and staffed a temporary branch office in
Jacksonville on Beach Boulevard. The increase in non-interest expense from 1997
to 1998 was due mainly to the implementation of the Company's business plan and
also involved hiring a Bank President, three Division Presidents, a Chief
Financial Officer and several other key positions. As a percentage of average
total assets, salaries and employee benefits have increased to 2.01% in 1999
compared 1.67% and 1.52% in 1998 and 1997, respectively.
Occupancy expenses (including furniture, fixtures & equipment) increased to
$1.8 million in 1999 compared to $1.6 million in 1998 and $1.4 million in 1997.
Occupancy expenses in 1999 were impacted by costs associated with the opening of
the temporary branch office on Beach Boulevard and the lease expense of
temporary offices for holding company personnel in Jacksonville. Offsetting
these expenses in 1999 was a reduction in maintenance contract expenses. The
increase from 1997 to 1998 was largely due to expenses associated with the West
90 Office opening in Lake City during August 1997.
Other operating expenses increased $836,000 and $320,000 in 1999 and 1998,
or 29% and 12%, respectively. The increase in 1999 was attributable to: (1) an
increase in postage and delivery expense of approximately $91,000 due to
increased deposit accounts and additional courier runs due to the opening of the
temporary Jacksonville branch office; (2) an increase of $152,000 in telephone
expense, with much of the increase resulting from the installation of a
bank-wide systems network and the added expenses from the offices opened in
Jacksonville; (3) an increase in marketing expense of $115,000 due to the
Company's increased advertising in the new markets and enhanced promotion of the
Bank in its present markets; (4) an increase in legal and professional fees of
$102,000, which is mainly attributable to increased accounting and data
processing fees. The main contributing factors in 1998 was an increase in
telephone expense, which resulted from the installation of a new toll free
telephone banking system in April 1997 allowing customers access to their
accounts 24 hours a day, seven days a week. Other contributing factors were
increases in employee education expense, legal and professional fees, and
postage and delivery service.
The following table details the areas of significance in other operating
expenses.
TABLE 2: OTHER OPERATING EXPENSES
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Data processing..................................... $ 590 $ 540 $ 519
Postage and delivery................................ 468 377 336
Telephone........................................... 423 271 185
Advertising and promotion........................... 354 239 257
Legal and professional.............................. 327 225 158
Supplies............................................ 299 244 231
Administrative...................................... 182 123 103
Amortization of intangible assets................... 179 190 202
Loan expenses....................................... 165 133 135
Regulatory fees..................................... 143 134 119
Other............................................... 593 411 322
------ ------ ------
Total other operating expenses.................... $3,723 $2,887 $2,567
====== ====== ======
19
INCOME TAXES
The effective tax rate for the year ended December 31, 1999 was 34.7%,
compared to 34.4% for 1998 and 34.7% for 1997. The consolidated provision for
income taxes increased to $1.6 million in 1999, compared to $1.4 million in 1998
and $1.6 million in 1997. Tax exempt investment income had a positive impact on
the effective rate of 2.7%, 2.9% and 2.3% in 1999, 1998 and 1997, respectively.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management addresses CNB's ability to meet deposit withdrawals
either on demand or at contractual maturity, to repay borrowings and to make new
loans and investments as they arise. 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. 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 of credit
for the purchase of federal funds by the Company's from its principal
correspondent banks. Average liquid assets (cash and amounts due from banks,
interest-bearing deposits in other banks, federal funds sold and securities
available-for-sale) totaled $81.1 million and represented 30.0% of average total
deposits during 1999, compared to $96.9 million and 39.1% for 1998.
The Company has available lines of credit with other financial institutions
totaling $15.0 million. The Company is also a member of the Federal Home Loan
Bank and as such has access to both long and short term funds. There was an
outstanding balance of $4.8 million in federal funds purchased at December 31,
1999.
The asset mix of the balance sheet is evaluated continually in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity. Management of the liability mix of the balance sheet focuses on
expanding the various funding sources.
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 on net interest income due to market changes and
interest rates.
TABLE 3, "Rate Sensitivity Analysis" presents rate sensitive assets and
liabilities 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 on December 31, 1999, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for pledging to secure borrowings from dealers and customers
pursuant to securities sold under repurchase agreements; loan repayments; loan
sales; deposits and certain interest rate-sensitive deposits; and borrowings
under overnight federal fund lines available from correspondent banks. In
addition to interest rate-sensitive deposits, the Company's primary demand for
liquidity is anticipated fundings under credit commitments to customers.
20
TABLE 3: RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
FAIR
1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS BEYOND TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- --------
INTEREST-EARNING ASSETS:
Loans
Fixed Rate Loans.................... $ 19,714 $13,394 $20,399 $20,582 $27,358 $ 57,203 $158,650 $157,147
Average Interest Rate............. 8.22% 9.64% 8.67% 8.79% 8.35% 8.17% 8.48%
Variable Rate Loans................. 19,362 12,927 4,816 4,707 3,713 61,909 107,434 107,434
Average Interest Rate............. 9.17% 8.85% 9.16% 8.89% 9.24% 8.10% 8.50%
Investment Securities(1)
Fixed Rate Investments.............. 4,429 7,587 90 179 20,431 10,187 42,903 41,324
Average Interest Rate............. 5.82% 6.50% 4.10% 7.10% 6.02% 5.71% 6.01%
Variable Rate Investments........... -- -- -- -- -- 1,792 1,792 1,797
Average Interest Rate............. 6.04% 6.04%
Other Earning Assets(2)............... 2,140 -- -- -- -- -- 2,140 2,192
Average Interest Rate............. 6.40% 6.40%
-------- ------- ------- ------- ------- -------- -------- --------
TOTAL INTEREST-EARNING ASSETS......... $ 45,645 $33,908 $25,305 $25,468 $51,502 $131,091 $312,919 $309,894
AVERAGE INTEREST RATE............. 8.30% 8.64% 8.75% 8.80% 7.49% 7.92% 8.12%
======== ======= ======= ======= ======= ======== ======== ========
INTEREST-BEARING LIABILITIES:
NOW................................... $ 14,358 $ -- $ -- $ -- $ -- $ 47,619 $ 61,977 $ 61,977
Average Interest Rate............. 4.72% 1.16% 1.98%
Money Market.......................... 31,411 -- -- -- -- 2,178 33,589 33,589
Average Interest Rate............. 4.66% 2.78% 4.54%
Savings............................... -- -- -- -- -- 16,537 16,537 16,537
Average Interest Rate............. 1.39% 1.39%
CD's $100,000 and Over................ 38,651 4,118 1,871 209 -- -- 44,849 44,846
Average Interest Rate............. 5.49% 5.85% 5.94% 4.83% 5.54%
CD's Under $100,000................... 72,714 12,071 3,088 1,064 204 -- 89,141 89,200
Average Interest Rate............. 4.83% 5.39% 5.45% 5.23% 5.54% 4.93%
Securities Sold Under
Repurchase Agreements............... 7,263 -- -- -- -- -- 7,263 7,263
Average Interest Rate............. 5.20% 5.20%
Federal Funds Purchased............... 4,800 -- -- -- -- -- 4,800 4,800
Average Interest Rate............. 5.36% 5.36%
-------- ------- ------- ------- ------- -------- -------- --------
TOTAL INTEREST-BEARING LIABILITIES.... $169,197 $16,189 $ 4,959 $ 1,273 $ 204 $ 66,334 $258,156 $258,212
AVERAGE INTEREST RATE............. 4.97% 5.51% 5.63% 5.16% 5.54% 1.27% 4.07%
======== ======= ======= ======= ======= ======== ======== ========
- ------------------------------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for unrealized gains of $857,000.
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank Stock,
Federal Home Loan Bank Stock and other marketable equity securities.
21
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, averaged 84.9% of total average deposits in 1999 and 85.0%
in 1998. The Company closely monitors its reliance on time deposits in excess of
$100,000. The Bank does not nor has it ever solicited brokered deposits. TABLE
4, sets forth the amounts of time deposits with balances of $100,000 or more
that mature within indicated periods.
TABLE 4: MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1999
AMOUNT
-----------
(THOUSANDS)
Three Months or Less........................................ $ 9,228
Three Through Six Months.................................... 12,159
Six Through Twelve Months................................... 17,264
Over Twelve Months.......................................... 6,198
-------
Total....................................................... $44,849
=======
LENDING ACTIVITIES
Loan growth of 42% in 1999 reflected continued growth in the Company's core
markets combined with the Company's execution of its expansion strategy in the
Jacksonville and Gainesville markets. An increased focus on commercial and
commercial real estate lending contributed significantly to the overall growth
in loans. The Company's loan to deposit ratio reached 92% at December 31, 1999
compared to 71% at the 1998 year end. The 1999 loan growth contributed to a 26%
increase in net interest income to $14.7 million for the year ended
December 31, 1999 compared to $11.7 million in 1998.
As of December 31, 1999 the Company had total loans of $266.1 million, as
compared to $187.0 million at December 31, 1998, an increase of $79.1 million or
42%. This growth was mainly due to $51.7 million, or 61% increase in commercial,
financial and agricultural loans. Real estate construction loans totaled
$18.9 million, or 7% of the loan portfolio, as compared to 4% in 1998.
Commercial, financial and agricultural loans, which include loans secured by
owner-occupied commercial real estate, totaled $136.9 million, or 52% of the
loan portfolio as compared to 46% in 1998. Real estate mortgage loans primarily
consisted of single family residential mortgages totaled $86.3 million, or 32%
of the loan portfolio in comparison to 39% in 1998. Installment and consumer
loans, which include credit card balances of approximately $1.5 million, totaled
$23.9 million, or 9% of the loan portfolio as compared to 11% in 1998. The
composition of the Company's loan portfolio for the past five years is presented
in TABLE 5.
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 exceed 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.
22
TABLE 5: LOAN PORTFOLIO COMPOSITION
AS OF DECEMBER 31,
----------------------------------------------------
TYPES OF LOANS 1999 1998 1997 1996 1995
- -------------- -------- -------- -------- -------- --------
(THOUSANDS)
Commercial, Financial and Agricultural.... $136,937 $ 85,208 $ 69,238 $ 68,595 $ 48,948
Real Estate--Construction................. 18,926 8,527 3,336 4,029 2,159
Real Estate--Mortgage..................... 86,275 72,357 68,561 56,787 34,912
Installment and Consumer.................. 23,946 20,923 18,514 19,413 16,330
-------- -------- -------- -------- --------
Total Loans, Net of Unearned Discount..... 266,084 187,015 159,649 148,824 102,349
Less: Allowance for Loan Losses........... (2,671) (1,875) (1,495) (1,396) (946)
-------- -------- -------- -------- --------
Net Loans................................. $263,413 $185,140 $158,154 $147,428 $101,403
======== ======== ======== ======== ========
TABLE 6 sets forth the maturity distribution for selected components of the
Company's loan portfolio as of December 31, 1999. Demand loans and overdrafts
are reported as due in one year or less, and loan maturity is based upon
scheduled principal payments.
TABLE 6: MATURITY SCHEDULE OF SELECTED LOANS
DECEMBER 31, 1999
-----------------------------------------
0-12 1-5 OVER 5
MONTHS YEARS YEARS TOTAL
-------- -------- -------- --------
(THOUSANDS)
Commercial, Financial &
Agricultural....................... $14,447 $ 72,737 $ 49,753 $136,937
Real Estate--Construction............ 18,926 -- -- 18,926
All Other Loans...................... 5,703 35,159 69,359 110,221
------- -------- -------- --------
Total................................ $39,076 $107,896 $119,112 $266,084
======= ======== ======== ========
Fixed Interest Rate.................. $19,714 $ 81,733 $ 57,203 $158,650
Variable Interest Rate............... $19,362 $ 26,163 $ 61,909 $107,434
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 exceed 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.
LOAN QUALITY
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 declined from $2.0 million at December 31, 1998 to
$831,000 at December 31, 1999. Non-performing assets as a percentage of total
assets decreased to 0.24% in 1999 from 0.65% in 1998. The improvement (or
decrease) in non-performing assets is attributed to the liquidation of several
other real estate owned ("OREO") properties, as well as liquidating several
loans guaranteed by the Small Business Administration.
Management is continually analyzing its loan portfolio in an effort to
recognize and resolve its problem assets as quickly and efficiently as possible.
TABLE 7 sets forth certain categories of risk elements on non-performing assets
for the past five years.
23
TABLE 7: NON-PERFORMING ASSETS
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-Accrual Loans...................... $ 549 $1,393 $1,045 $ 87 $ 372
Past Due Loans 90 Days or More
and Still Accruing................... 180 22 158 229 159
Other Real Estate Owned
& Repossessions...................... 102 613 320 88 126
----- ------ ------ ----- -----
Total Non-Performing Assets........ $ 831 $2,028 $1,523 $ 404 $ 657
===== ====== ====== ===== =====
Percent of Total Assets................ 0.24% 0.65% 0.56% 0.16% 0.37%
===== ====== ====== ===== =====
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 due 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 management believes 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.
TABLE 8: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- --------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial, Financial and
Agricultural............ $1,670 51.5% $1,061 45.6% $ 932 43.4% $ 821
Real
Estate--Construction.... 12 7.1% 6 4.5% 9 2.1% 5
Real Estate--Mortgage..... 220 32.4% 127 38.7% 163 42.9% 154
Consumer.................. 769 9.0% 621 11.2% 391 11.6% 416
Unallocated............... -- -- 60 -- -- -- --
------ ----- ------ ----- ------ ----- ------
Total................... $2,671 100% $1,875 100% $1,495 100% $1,396
====== ===== ====== ===== ====== ===== ======
DECEMBER 31,
------------------------------
1996 1995
-------- -------------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
LOANS AMOUNT LOANS
-------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial, Financial and
Agricultural............ 46.1% $476 47.8%
Real
Estate--Construction.... 2.7% 5 2.1%
Real Estate--Mortgage..... 38.2% 72 34.1%
Consumer.................. 13.0% 389 16.0%
Unallocated............... -- 4 --
----- ---- -----
Total................... 100% $946 100%
===== ==== =====
The allowance for loan losses on December 31, 1999, was $2.7 million, or
1.00% of total loans outstanding, net of unearned income compared to
$1.9 million or 1.00% at December 31, 1998. The increase in the allowance is a
direct result of the loan growth experienced in 1999.
TABLE 8 provides an allocation of the allowance for loan losses to specific
loan categories for each of the past five years. TABLE 9: "Activity in Allowance
for Loan Losses" indicates activity in the allowance for loan losses for the
years 1999, 1998, 1997, 1996 and 1995.
24
TABLE 9: ACTIVITY IN ALLOWANCE FOR LOAN LOSSES
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at Beginning of Year.............. $ 1,875 $ 1,495 $ 1,396 $ 946 $ 827
Allowance Acquired by Merger.............. -- -- -- 370 --
Loans Charged-Off:
Commercial, Financial and
Agricultural.......................... 312 123 160 79 11
Real Estate, Mortgage................... 13 3 -- 1 --
Consumer................................ 309 296 248 203 159
-------- -------- -------- -------- --------
Total Loans Charged-Off............... (634) (422) (408) (283) (170)
Recoveries on Loans Previously
Charged-Off:
Commercial, Financial and
Agricultural.......................... 188 41 24 7 17
Real Estate Mortgage.................... -- 7 -- 1 --
Consumer................................ 82 44 43 20 42
-------- -------- -------- -------- --------
Total Loan Recoveries................. 270 92 67 28 59
-------- -------- -------- -------- --------
Net Loans Charged-Off............... (364) (330) (341) (255) (111)
-------- -------- -------- -------- --------
Provision for Loan Losses
Charged to Expense...................... 1,160 710 440 335 230
-------- -------- -------- -------- --------
Ending Balance............................ $ 2,671 $ 1,875 $ 1,495 $ 1,396 $ 946
======== ======== ======== ======== ========
Total Loans Outstanding................... $266,084 $187,015 $159,649 $148,824 $102,349
Average Loans Outstanding................. $215,861 $171,048 $155,168 $117,450 $ 93,454
Allowance for Loan Losses to Loans
Outstanding............................. 1.00% 1.00% 0.94% 0.94% 0.92%
Net Charge-Offs to Average Loans
Outstanding............................. 0.17% 0.19% 0.22% 0.22% 0.12%
INVESTMENT PORTFOLIO
The Company uses its securities portfolio primarily as a source of liquidity
and a base from which to pledge assets for repurchase agreements and public
deposits. The total recorded value of securities was $45.7 million at
December 31, 1999, a decrease of 27% from $62.3 million at the end of 1998.
Securities are classified as either held-to-maturity or available-for-sale which
are recorded at fair market value. Securities available-for-sale, which made up
77% of the total investment portfolio as of December 31, 1999 had a value of
$35.1 million. With most of the portfolio being in the available-for-sale
category, the Company has the flexibility in case an immediate need for
liquidity arises. The unrealized gains or losses, net of tax, do not impact net
income or regulatory capital but are recorded as adjustments to shareholders'
equity. At December 31, 1999, shareholders' equity included a net unrealized
loss of $537,000 compared to net unrealized gain of $418,000 at December 31,
1998.
As a percent of total earning assets, the investment portfolio has deceased
to a level of 15% at December 31, 1999 compared to 22% for year ended 1998. The
significant decrease in the size of the portfolio relative to total earning
assets is attributable to the increase in loan growth which improved the mix of
earning assets.
The Company invests primarily in direct obligations of the United States,
obligations guaranteed as to the principal and interest by the United States and
obligations of agencies of the United States. In addition, the Company enters
into federal funds transactions with its principal correspondent banks. The
Federal Reserve Bank and Federal Home Loan Bank also require equity investments
to be maintained by the Company.
25
TABLE10 sets forth the breakdown of investment securities by maturities and
TABLE 10A displays the average yield by range of maturities.
TABLE 10: MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (1)
DECEMBER 31, 1999
HELD TO MATURITY AVAILABLE FOR SALE
------------------------ ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
--------- ------------ --------- ------------
DOLLARS IN THOUSANDS
U.S. Treasury:
One Year or Less............................... $ -- $ -- $ 2,498 $ 2,501
Over One Through Five Years.................... -- -- 7,482 7,513
------- ------ ------- -------
Total U.S. Treasury.............................. -- -- 9,980 10,014
U.S. Government Agencies and Corporations:
Over One Through Five Years.................... -- -- 20,000 19,062
Over Five Through Ten Years.................... 8,721 8,132 -- --
------- ------ ------- -------
Total U.S. Government Agencies and
Corporations................................... 8,721 8,132 20,000 19,062
Obligations of State and Political Subdivisions:
Over One Through Five Years.................... -- -- 85 85
Over Five Through Ten Years.................... -- -- 790 786
Over Ten Years................................. -- -- 708 704
------- ------ ------- -------
Total Obligations of State and Political
Subdivisions................................... -- -- 1,583 1,575
Mortgage-Backed Securities (2):
One Year or Less............................... 1,846 1,770 -- --
Over One Through Five Years.................... 15 15 -- --
Over Five Through Ten Years.................... -- -- 865 865
Over Ten Years................................. -- -- 1,685 1,688
------- ------ ------- -------
Total Mortgage-Backed Securities................. 1,861 1,785 2,550 2,553
Other Securities:
Over Ten Years (3)............................. -- -- 1,855 1,907
------- ------ ------- -------
Total Other Securities........................... -- -- 1,855 1,907
------- ------ ------- -------
Total Securities................................. $10,582 $9,917 $35,968 $35,111
======= ====== ======= =======
- ------------------------
(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.
26
TABLE 10A: WEIGHTED AVERAGE YIELD BY RANGE OF MATURITIES
DECEMBER 31,
-----------------------
1999 1998
-------- --------
One Year or Less............................................ 5.81% 5.23%
Over One through Five Years................................. 6.15 6.26
Over Five through Ten Years................................. 5.78 5.82
Over Ten Years(1)........................................... 5.65 5.91
- ------------------------
(1) Represents adjustable rate, mortgage-backed securities which are repriceable
within one year.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1999 was $43.1 million, as compared to
$30.9 million at December 31, 1998. In 1999, the Board of Directors declared
dividends totaling $0.20 per share, consistent with 1998. At December 31, 1999,
the Company's common stock had a book value of $7.04 per share compared to $6.36
per share in 1998.
On January 29, 1999 the Company began trading on the NASDAQ National Market
under the symbol "CNBB" after issuing 1,250,000 shares of common stock in the
initial public offering at $10.25 per common share. Proceeds from the offering
net of underwriting discount and expenses totaled $11.4 million, which are being
used to support expansion plans and for general corporate purposes.
The Comptroller establishes risk based capital guidelines for national
banks. These guidelines are intended to provide an additional measure of a
bank's capital adequacy by assigning weighted levels of risk to asset
categories. Banks are also required to systematically hold capital against such
"off balance sheet" activities as loans sold with recourse, loan commitments,
guarantees and standby letters of credit. These guidelines are intended to
strengthen the quality of capital by increasing the emphasis on common equity
and restricting the amount of loss reserves and other forms of equity such as
preferred stock that may be included in capital.
Under the terms of the guidelines, banks must meet minimum capital adequacy
based upon both total assets and risk adjusted assets. All banks are required to
maintain a minimum ratio of total capital to risk-weighted assets of 8% and a
minimum ratio of Tier 1 capital to risk-weighted assets of 4%. Tier 1 Capital
includes common shareholders' equity and qualifying preferred stock, less
goodwill and other adjustments. Tier 2 Capital consists of preferred stock not
qualifying as Tier 1 Capital, mandatory convertible debt, limited amounts of
subordinated debt, other qualifying term debt and the allowance for credit
losses up to 1.25% of risk-weighted assets. Total Capital consists of Tier 1
Capital and Tier 2 Capital. The regulatory agencies have also established an
additional capital adequacy guideline referred to as the Tier 1 leverage ratio
that measures the ratio of Tier 1 capital to average quarterly assets.
At December 31, 1999, the Company's Tier 1 capital, total risk-based capital
and Tier 1 leverage ratios were 16.2%, 17.3% and 12.7%, respectively. Adherence
to these guidelines has not had an adverse impact on the Company or its banking
subsidiary. Selected capital ratios at year end 1999 as compared to 1998 are
shown in TABLE 11.
TABLE 11: CAPITAL RATIOS
DECEMBER 31,
----------------------- WELL CAPITALIZED REGULATORY
1999 1998 REQUIREMENTS MINIMUMS
-------- -------- ---------------- ----------
Risk Based Capital Ratios:
Tier 1 Capital Ratio................................ 16.2% 15.6% 6.0% 4.0%
Total Capital to Risk-Weighted Assets............... 17.3% 16.6% 10.0% 8.0%
Tier 1 Leverage Ratio................................. 12.7% 9.7% 5.0% 4.0%
27
QUARTERLY FINANCIAL INFORMATION
Table 12 sets forth, for the periods indicated, certain consolidated
quarterly financial information of the Company. This information is derived from
the Company's unaudited financial statements which include, in the opinion of
management, all normal recurring adjustments which management considers
necessary for a fair presentation of the results for such periods. The results
for any quarter are not necessarily indicative of results for any future period.
TABLE 12: SELECTED QUARTERLY DATA
1999 1998
----------------------------------------- -----------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Summary of Operations:
Net interest income..................... $ 3,998 $ 3,774 $ 3,589 $ 3,345 $ 3,028 $ 2,943 $ 2,941 $ 2,790
Provision for loan losses............... (375) (275) (310) (200) (310) (170) (150) (80)
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses........................... 3,623 3,499 3,279 3,145 2,718 2,773 2,791 2,710
Other income (excluding securities
transactions)......................... 783 739 743 687 674 579 565 570
Securities gains, net................... -- -- -- -- 2 -- -- 2
Other expenses.......................... (3,465) (3,026) (2,819) (2,684) (2,463) (2,381) (2,292) (2,162)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income tax expense........ 941 1,212 1,203 1,148 931 971 1,064 1,120
Income tax expense...................... (322) (423) (418) (400) (319) (333) (367) (388)
-------- -------- -------- -------- -------- -------- -------- --------
Net income.............................. $ 619 $ 789 $ 785 $ 748 $ 612 $ 638 $ 697 $ 732
======== ======== ======== ======== ======== ======== ======== ========
Per Common Share:
Basic earnings per common share......... $ 0.10 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.15 $ 0.15
Diluted earnings per common share....... 0.09 0.13 0.13 0.13 0.13 0.13 0.14 0.15
Dividends Declared...................... 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Book Value.............................. 7.04 7.05 6.99 6.99 6.36 6.29 6.18 6.09
Market Price (1)
High.................................. 10.56 10.88 10.25 10.25 -- -- -- --
Low................................... 9.00 8.75 9.66 8.00 -- -- -- --
Close................................. 9.63 10.69 10.00 9.75 -- -- -- --
Balance Sheet Data:
Assets.................................. $346,076 $330,106 $314,816 $315,653 $311,565 $290,566 $287,752 $279,546
Loans................................... 266,084 228,371 216,856 200,326 187,015 176,622 173,854 160,403
Deposits................................ 288,203 274,456 263,408 262,895 265,109 249,173 248,003 241,417
Shareholders' Equity.................... 43,075 43,075 42,715 42,691 30,896 30,555 30,016 29,558
- ------------------------------
(1) Prior to January 29, 1999, there was not an established trading market for
the common stock of CNB Florida Bancshares, Inc.
28
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange Commission adopted
amendments to Regulation S-K, Regulation S-X, and various forms (Securities Act
Release No. 7386) to clarify and expand existing requirements for disclosures
about derivatives and market risks inherent in derivatives and other financial
instruments. No derivative financial instruments are held by the Company, but
other financial instruments, which include investments, loans and deposit
liabilities are included in the Company's balance sheet. The release requires
quantitative and qualitative disclosures about market risk. 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
December 31, 1999, the estimated fair values would necessarily have been
achieved at that date, since market values may differ depending on various
circumstances. The estimated fair values at December 31, 1999 would not
necessarily be considered to apply at subsequent dates.
FINANCIAL STATEMENTS
The consolidated financial statements which follow have been audited by the
Company's independent certified public accountants, Arthur Andersen LLP. Their
opinion on the Company's consolidated financial statements is also included
therein.
29
CNB FLORIDA BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of CNB
Florida Bancshares, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial
condition of CNB FLORIDA BANCSHARES, INC. (a Florida corporation) AND SUBSIDIARY
as of December 31, 1999 and 1998 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CNB Florida
Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
February 10, 2000
31
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks..................................... $ 17,235 $ 12,630
Federal funds sold.......................................... -- 25,250
Interest-bearing deposits in other banks.................... 285 11,007
-------- --------
Total cash and cash equivalents....................... 17,520 48,887
Investment securities available for sale.................... 35,111 59,337
Investment securities held to maturity...................... 10,582 2,940
Loans, net.................................................. 263,413 185,140
Premises and equipment, net................................. 14,395 10,754
Other assets................................................ 5,055 4,507
-------- --------
Total assets.......................................... $346,076 $311,565
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand............................... $ 42,110 $ 35,701
Savings, NOW and money market............................. 112,103 92,495
Time under $100,000....................................... 89,141 95,369
Time $100,000 and over.................................... 44,849 41,544
-------- --------
Total deposits........................................ 288,203 265,109
Securities sold under repurchase agreements................. 7,263 12,570
Federal funds purchased..................................... 4,800 --
Other liabilities........................................... 2,735 2,990
-------- --------
Total liabilities..................................... 303,001 280,669
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 17 AND 18)
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,
6,116,070 shares issued and outstanding for 1999 and
4,856,770 shares issued and outstanding for 1998.......... 61 49
Additional paid-in capital.................................. 30,805 19,465
Retained earnings........................................... 12,746 10,964
Accumulated other comprehensive (loss) income, net of
taxes..................................................... (537) 418
-------- --------
Total shareholders' equity............................ 43,075 30,896
-------- --------
Total liabilities and shareholders' equity............ $346,076 $311,565
======== ========
The accompanying notes are an integral part of these financial statements.
32
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS AND SHARES IN THOUSANDS)
INTEREST INCOME
Interest and fees on loans................................ $19,412 $15,877 $14,542
Interest on investment securities available for sale...... 2,671 2,869 3,560
Interest on investment securities held to maturity........ 504 326 490
Interest on federal funds sold............................ 643 1,701 720
Interest on interest-bearing deposits..................... 528 346 108
------- ------- -------
Total interest income............................... 23,758 21,119 19,420
------- ------- -------
INTEREST EXPENSE
Interest on deposits...................................... 8,725 9,051 8,255
Interest on short-term borrowings......................... 327 359 239
Interest on notes payable................................. -- 7 169
------- ------- -------
Total interest expense.............................. 9,052 9,417 8,663
------- ------- -------
NET INTEREST INCOME......................................... 14,706 11,702 10,757
PROVISION FOR LOAN LOSS..................................... 1,160 710 440
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS........... 13,546 10,992 10,317
------- ------- -------
NON-INTEREST INCOME
Service charges........................................... 2,122 1,811 1,734
Other fees and charges.................................... 830 577 418
Gain on sale of securities................................ -- 4 1
------- ------- -------
Total non-interest income........................... 2,952 2,392 2,153
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits............................ 6,461 4,819 3,960
Occupancy and equipment expenses.......................... 1,810 1,592 1,387
Other operating expenses.................................. 3,723 2,887 2,567
------- ------- -------
Total non-interest expense.......................... 11,994 9,298 7,914
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 4,504 4,086 4,556
INCOME TAXES................................................ 1,563 1,407 1,581
------- ------- -------
NET INCOME.................................................. $ 2,941 $ 2,679 $ 2,975
======= ======= =======
EARNINGS PER SHARE
Basic earnings per share.................................. $ 0.49 $ 0.55 $ 0.69
======= ======= =======
Basic weighted average shares outstanding................. 5,995 4,857 4,328
======= ======= =======
Diluted earnings per share................................ $ 0.48 $ 0.55 $ 0.68
======= ======= =======
Diluted weighted average shares outstanding............... 6,070 4,898 4,407
======= ======= =======
The accompanying notes are an integral part of these financial statements.
33
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------------------------------
ACCUMULATED
COMMON OTHER
STOCK ADDITIONAL COMPREHENSIVE TOTAL
------------------- PAID-IN RETAINED INCOME (LOSS), SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS NET OF TAXES EQUITY
-------- -------- ---------- -------- -------------- -------------
(DOLLARS AND SHARES IN THOUSANDS)
BALANCE, DECEMBER 31, 1996................ 3,875 $39 $12,663 $ 6,901 $ 66 $19,669
Comprehensive income:
Net income.............................. 2,975
Change in unrealized gain on investment
securities available for sale, net of
taxes................................. 189
Total comprehensive income.......... 3,164
Cash dividends............................ (620) (620)
Issuance of common stock, net of offering
cost.................................... 969 10 6,744 6,754
Issuance of common stock for option
agreements, net of repurchases.......... 12 58 58
----- --- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1997................ 4,856 49 19,465 9,256 255 29,025
Comprehensive income:
Net income.............................. 2,679
Change in unrealized gain on investment
securities available for sale, net of
taxes................................. 163
Total comprehensive income.......... 2,842
Cash dividends............................ (971) (971)
----- --- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1998................ 4,856 49 19,465 10,964 418 30,896
Comprehensive income:
Net income.............................. 2,941
Change in unrealized gain on investment
securities available for sale, net of
taxes................................. (955)
Total comprehensive income.......... 1,986
Cash dividends............................ (1,159) (1,159)
Issuance of common stock, net of offering
cost.................................... 1,250 12 11,356 11,368
Exercise of stock options................. 2 9 9
Repurchase of common stock................ (10) (96) (96)
Issuance of restricted stock.............. 18 71 71
----- --- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1999................ 6,116 $61 $30,805 $12,746 $(537) $43,075
===== === ======= ======= ===== =======
The accompanying notes are an integral part of these financial statements.
34
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 2,941 $ 2,679 $ 2,975
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 971 894 828
Provision for loan losses............................... 1,160 710 440
Investment securities (accretion) amortization, net..... (278) 54 135
Non-cash compensation................................... 71 -- --
Deferred income tax benefit............................. (242) (14) (30)
Changes in assets and liabilities:
Other assets.......................................... 82 (515) (246)
Other liabilities..................................... (255) 735 219
-------- -------- --------
Net cash provided by operating activities........... 4,450 4,543 4,321
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans..................................... (79,433) (27,696) (11,165)
Purchases of investment securities available for sale..... (20,413) (28,908) (17,192)
Purchases of investment securities held to maturity....... (8,754) -- --
Proceeds from called investment securities available for
sale.................................................... 3,000 -- --
Proceeds from maturities of investment securities
available for sale...................................... 40,442 22,654 25,417
Proceeds from maturities of investment securities held to
maturity................................................ 1,064 5,121 1,877
Purchases of premises and equipment....................... (4,432) (1,341) (1,284)
-------- -------- --------
Net cash used in investing activities............... (68,526) (30,170) (2,347)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.................................. 23,094 33,665 4,620
Net (decrease) increase in securities sold under
repurchase agreements................................... (5,307) 3,413 5,390
Federal funds purchased................................... 4,800 -- --
Repayment of note payable................................. -- (1,450) (1,200)
Cash dividends............................................ (1,159) (971) (620)
Issuance of common stock.................................. 11,368 -- 6,754
Repurchase of common stock................................ (96) -- --
Exercise of stock options................................. 9 -- 58
-------- -------- --------
Net cash provided by financing activities........... 32,709 34,657 15,002
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (31,367) 9,030 16,976
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 48,887 39,857 22,881
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 17,520 $ 48,887 $ 39,857
======== ======== ========
The accompanying notes are an integral part of these financial statements.
35
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND NATURE OF OPERATIONS
CNB Florida Bancshares, Inc. (the "Company") is a registered bank holding
company incorporated in Florida. The Company operates a wholly owned banking
subsidiary, CNB National Bank (the "Bank"), which is chartered as a national
bank. The Bank is a member of the Federal Reserve System and conducts business
from a total of 12 banking offices in north Florida. The Company offers a full
range of lending and deposit products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company follows generally accepted accounting
principles and reporting practices applicable to the banking industry in the
United States.
RECLASSIFICATIONS
Certain amounts and captions presented in the 1998 and 1997 financial
statements have been adjusted to conform to the 1999 presentation. The financial
statements, as well as share and per share data, and other information have been
reclassified to reflect the two-for-one stock split effective August 17, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT SECURITIES
AVAILABLE FOR SALE
Securities available for sale represent investment securities which are
used for asset/liability, liquidity, and other funds management purposes
which are deemed to have indefinite holding periods. These securities are
recorded at fair value, with unrealized gain and losses, net of deferred
income taxes, recorded in the accumulated other comprehensive (loss) income
component of shareholders' equity.
HELD TO MATURITY
Securities held to maturity represent investment securities where the
Company's intent and ability is to hold the securities to maturity. These
securities are stated at cost, adjusted for amortization of premiums and
accretion of discounts.
Amortization and accretion of premiums and discounts are recognized as
adjustments to interest income. Realized gains and losses are recognized using
the specific identification method.
36
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND LOAN FEES
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan loss. Interest on substantially all loans other than installment loans
is calculated by using the simple interest method on daily balances of the
principal amounts outstanding. Interest on some installment loans is recognized
using the rule-of-78s method, the results of which are not materially different
than the interest method.
Loan fees, net of loan origination costs, are capitalized and amortized as
yield adjustments over the respective loan terms using a method which does not
differ significantly from the interest method. For 1999, 1998 and 1997, loan
fees included in interest and fees on loans amounted to approximately $697,000,
$572,000 and $531,000, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to income. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb inherent losses on existing loans that may become uncollectible based
on evaluations of the collectibility of the loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrowers' ability to pay.
Accrual of interest is discontinued on loans that are 90 days or more past due,
unless substantially collateralized and in the process of collection, or sooner
if, in the opinion of management, the borrower's financial condition is such
that collection of principal or interest is doubtful.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Maintenance and repairs are charged to expenses as
incurred. Gains and losses on dispositions are reflected in income.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their value may be impaired, an
assessment of recoverability is performed prior to any write-down of the asset.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying amount or at
fair value, less cost to sell.
INTANGIBLES
The Company has intangible assets with carrying amounts of approximately
$1,187,000 and $1,366,000 at December 31, 1999 and 1998, respectively.
Intangible assets consist of core deposits and goodwill. Core deposit
intangibles are being amortized over a 10-year period using the straight-line
method. Goodwill is
37
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
being amortized over a 15-year period on a straight-line method. Amortization of
intangible assets was approximately $179,000, $190,000 and $202,000 for 1999,
1998 and 1997, respectively.
Periodically, the Company reviews its intangible assets for events or
changes in circumstances that may indicate that the carrying amounts of the
assets are not recoverable.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
The Company and the Bank file consolidated federal and state income tax
returns. Under a tax-sharing arrangement, income tax charges or credits are
generally allocated to the Company and the Bank on the basis of their respective
taxable income or loss that is included in the consolidated income tax return,
as determined by the separate return method.
EARNINGS PER SHARE
Basic earnings per share is calculated based on weighted average number of
shares of common stock outstanding. Diluted earnings per share is calculated
based on the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents are determined using the
treasury method for diluted shares outstanding. The difference between diluted
and basic shares outstanding is common stock equivalents from stock options and
restricted stock outstanding in the years ended December 31, 1999, 1998 and
1997.
SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits in other banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods and
all cash equivalents have an original maturity of 90 days or less. Cash paid for
interest was approximately $9,206,000, $9,049,000 and $8,308,000 during 1999,
1998 and 1997, respectively, and cash paid for income taxes was approximately
$1,720,000, $1,384,000 and $1,785,000 during 1999, 1998 and 1997, respectively.
38
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 1999 and 1998 are as follows (in thousands):
U.S. U.S. STATE, MORTGAGE-
TREASURY GOVERNMENT COUNTY, AND BACKED
1999 SECURITIES AGENCIES MUNICIPAL SECURITIES OTHER TOTAL
- ---- ---------- ---------- ----------- ---------- -------- --------
Amortized cost............ $ 9,980 $20,000 $1,583 $2,550 $1,855 $35,968
Gross unrealized:
Gains................... 34 -- -- 3 52 89
Losses.................. -- (938) (8) -- -- (946)
------- ------- ------ ------ ------ -------
Estimated fair value...... $10,014 $19,062 $1,575 $2,553 $1,907 $35,111
======= ======= ====== ====== ====== =======
U.S. U.S. STATE, MORTGAGE-
TREASURY GOVERNMENT COUNTY, AND BACKED
1998 SECURITIES AGENCIES MUNICIPAL SECURITIES OTHER TOTAL
- ---- ---------- ---------- ----------- ---------- -------- --------
Amortized cost............ $17,966 $33,525 $1,581 $4,157 $1,443 $58,672
Gross unrealized:
Gains................... 460 23 80 25 82 670
Losses.................. -- -- -- (5) -- (5)
------- ------- ------ ------ ------ -------
Estimated fair value...... $18,426 $33,548 $1,661 $4,177 $1,525 $59,337
======= ======= ====== ====== ====== =======
Amortized cost and estimated fair value of investment securities held to
maturity at December 31, 1999 and 1998 are as follows (in thousands):
U.S. MORTGAGE-
GOVERNMENT BACKED
1999 AGENCIES SECURITIES TOTAL
- ---- ---------- ---------- --------
Amortized cost................................. $8,721 $1,861 $10,582
Gross unrealized:
Gains........................................ -- -- --
Losses....................................... (589) (76) (665)
------ ------ -------
Estimated fair value........................... $8,132 $1,785 $ 9,917
====== ====== =======
MORTGAGE-
BACKED
1998 SECURITIES TOTAL
- ---- ---------- --------
Amortized cost............................................. $2,940 $2,940
Gross unrealized:
Gains.................................................... 4 4
Losses................................................... -- --
------ ------
Estimated fair value....................................... $2,944 $2,944
====== ======
Interest income earned on tax-exempt securities in 1999, 1998 and 1997 was
approximately $87,000, $83,000 and $91,000, respectively. Dividends of
approximately $113,000, $93,000 and $84,000 on stock of
39
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT SECURITIES (CONTINUED)
the Federal Reserve Bank and the Federal Home Loan Bank are included in interest
on investment securities available for sale in 1999, 1998 and 1997,
respectively.
The amortized cost and estimated fair value of securities at December 31,
1999, by contractual maturity, are shown below (in thousands):
INVESTMENT SECURITIES INVESTMENT SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
DUE IN: COST FAIR VALUE COST FAIR VALUE
- ------- --------- ---------- --------- ----------
One year or less..................... $ 2,498 $ 2,501 $ -- $ --
After one through five years......... 27,567 26,660 -- --
After five through ten............... 790 786 8,721 8,132
Over ten years....................... 708 704 -- --
Mortgage-backed securities and
others............................. 4,405 4,460 1,861 1,785
------- ------- ------- ------
$35,968 $35,111 $10,582 $9,917
======= ======= ======= ======
At December 31, 1999, U. S. Treasury and Government agency securities with
an amortized cost of approximately $26,611,000 and an estimated fair value of
approximately $25,792,000 were pledged to secure public funds, treasury tax and
loan deposits, and repurchase agreements.
4. LOANS, ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
Loans at December 31, 1999 and 1998 were comprised of the following (in
thousands):
1999 1998
-------- --------
Commercial, financial, and agricultural................. $136,937 $ 85,208
Real estate--construction............................... 18,926 8,527
Real estate--mortgage................................... 86,275 72,357
Installment and consumer lines.......................... 23,946 20,923
-------- --------
Total loans, net of unearned discount............... 266,084 187,015
Less allowance for loan losses.......................... (2,671) (1,875)
-------- --------
Net loans........................................... $263,413 $185,140
======== ========
Activity in the allowance for loan losses account was as follows for the
years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
-------- -------- --------
Balance beginning of year........................... $1,875 $1,495 $1,396
Provision......................................... 1,160 710 440
Charge-offs....................................... (634) (422) (408)
Recoveries........................................ 270 92 67
------ ------ ------
Balance at end of year.............................. $2,671 $1,875 $1,495
====== ====== ======
40
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS, ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS (CONTINUED)
Nonaccrual loans totaled approximately $549,000 and $1,393,000 at
December 31, 1999 and 1998, respectively. Foregone interest, which would have
otherwise been recorded on nonaccrual loans, including those loans that were
nonaccrual at sometime during the year and later paid, reinstated or charged
off, was approximately $23,000, $56,000 and $51,000, in 1999, 1998 and 1997,
respectively. In addition to nonaccrual loans, nonperforming assets include
other real estate owned related to property acquired by foreclosure in
settlement of debt. Other real estate owned was approximately $88,000 and
$600,000 at December 31, 1999 and 1998, respectively, and is included in other
assets in the accompanying consolidated statement of financial condition.
The Company recognizes income on impaired loans primarily on the cash basis.
Any change in the present value of expected cash flows is recognized through the
allowance for loan losses. Impaired loan information for the year ended
December 31, 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997
-------- -------- --------
Impaired loans with an allowance..................... $686 $1,744 $ 811
Impaired loans without an allowance (1).............. -- -- 583
---- ------ ------
Total impaired loans............................. $686 $1,744 $1,395
==== ====== ======
Allowance for impaired loans......................... $159 $ 408 $ 267
==== ====== ======
Interest income recognized on impaired loans during
the year........................................... $ 21 $ 93 $ 73
==== ====== ======
- ------------------------
(1) Impaired loans determined to be carried at or below fair value of the
underlying collateral and, as such, do not require an allowance.
The average balance of impaired loans during 1999, 1998 and 1997
approximated $1.2 million.
5. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following components at
December 31 (in thousands):
1999 1998
-------- --------
Buildings and improvements................................ $ 8,757 $ 8,629
Equipment and furnishings................................. 5,382 4,213
Land...................................................... 3,904 2,552
Construction in progress.................................. 1,813 52
------- -------
19,856 15,446
Less accumulated depreciation............................. (5,461) (4,692)
------- -------
$14,395 $10,754
======= =======
Depreciation was approximately $792,000, $704,000 and $626,000 for 1999,
1998 and 1997, respectively.
41
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TIME DEPOSITS
At December 31, 1999, the scheduled maturities of time certificates of
deposit are as follows (in thousands):
2000........................................................ $111,365
2001........................................................ 16,189
2002........................................................ 4,959
2003........................................................ 1,273
2004 and thereafter......................................... 204
--------
$133,990
========
7. REPURCHASE AGREEMENTS
The Bank has entered into repurchase agreements with several customers under
which the Bank pledges investment securities owned and under its control as
collateral against the one-day agreements. The daily average balance of these
agreements during 1999, 1998, and 1997 was approximately $6,854,000, $7,233,000
and $4,738,000, respectively. Interest expense in 1999, 1998 and 1997 was
approximately $322,000, $359,000 and $238,000, respectively, resulting in an
average rate paid of 4.70% in 1999, 4.97% in 1998 and 5.03% in 1997. The highest
amount outstanding during 1999, 1998 and 1997 was approximately $10,700,000,
$12,570,000 and $9,157,000, respectively.
8. OTHER OPERATING EXPENSES
Components of other operating expenses are as follows for the years ended
December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
-------- -------- --------
Data processing..................................... $ 590 $ 540 $ 519
Postage and delivery................................ 468 377 336
Advertising and promotion........................... 354 239 257
Supplies............................................ 299 244 231
Amortization of intangible assets................... 179 190 202
Telephone........................................... 423 271 185
Legal and professional.............................. 327 225 158
Loan expense........................................ 165 133 135
Regulatory fees..................................... 143 134 119
Administrative...................................... 182 123 103
Other............................................... 593 411 322
------ ------ ------
$3,723 $2,887 $2,567
====== ====== ======
42
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1999,
1998 and 1997 consisted of the following components (in thousands):
1999 1998 1997
-------- -------- --------
Current:
Federal........................................... $1,598 $1,365 $1,438
State............................................. 207 56 173
------ ------ ------
Total........................................... $1,805 $1,421 $1,611
====== ====== ======
Deferred:
Federal........................................... $ (244) $ (147) $ (69)
State............................................. 2 133 39
------ ------ ------
Total........................................... $ (242) $ (14) $ (30)
====== ====== ======
Total:
Federal........................................... $1,354 $1,218 $1,369
State............................................. 209 189 212
------ ------ ------
Total........................................... $1,563 $1,407 $1,581
====== ====== ======
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities and
their respective tax bases. Significant components of and the resultant deferred
tax assets and liabilities at December 31, 1999 and 1998 are as follows:
1999 1998
-------- --------
Deferred tax liabilities:
Property and equipment.................................... $(650) $(685)
Unearned loan fees........................................ (81) (37)
Unrealized gain on investment securities available for
sale.................................................... -- (248)
----- -----
(731) (970)
----- -----
Deferred tax assets:
Loan loss provisions...................................... 858 607
Unrealized loss on investment securities available for
sale.................................................... 320 --
Intangible assets......................................... 105 94
Other items............................................... 39 50
----- -----
1,322 751
----- -----
Net deferred tax asset (liability).......................... $ 591 $(219)
===== =====
43
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The reasons for the differences between the statutory federal income tax
rate and the effective tax rate are summarized as follows for the years ended
December 31, 1999, 1998 and 1997:
1999 1998 1997
-------- -------- --------
Statutory rates....................................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income......................... (2.7) (2.9) (2.3)
State income taxes, net............................. 2.5 2.6 2.5
Nondeductible expenses.............................. 0.9 0.7 0.5
---- ---- ----
34.7% 34.4% 34.7%
==== ==== ====
10. COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and changes in
unrealized gains (losses) on securities available-for-sale, net of income taxes.
Comprehensive income for 1999, 1998 and 1997 is calculated as follows (in
thousands):
1999 1998 1997
-------- -------- --------
Unrealized (loss) gains recognized in other
comprehensive income (net):
Before tax....................................... $(1,523) $ 258 $ 301
Income tax....................................... (568) 95 112
------- ------ ------
Net of tax....................................... $ (955) $ 163 $ 189
======= ====== ======
Amounts reported in net income:
Gain on sale of securities....................... $ -- $ 4 $ 1
Net (accretion) amortization..................... (278) 54 135
------- ------ ------
Reclassification adjustment...................... (278) 58 136
Income tax expense............................... 96 (20) (47)
------- ------ ------
Reclassification adjustment, net of tax.......... $ (182) $ 38 $ 89
======= ====== ======
Amounts reported in other comprehensive income:
Unrealized (loss) gains arising during period,
net of tax..................................... $(1,137) $ 201 $ 278
Reclassification adjustment, net of tax.......... 182 (38) (89)
------- ------ ------
Unrealized (loss) gains recognized in other
comprehensive income (net)..................... (955) 163 189
Net income....................................... 2,941 2,679 2,975
------- ------ ------
Total comprehensive income..................... $ 1,986 $2,842 $3,164
======= ====== ======
44
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LOANS TO RELATED PARTIES
Certain officers and directors, and companies in which they held a 10% or
more beneficial ownership, were indebted to(or in some cases, guaranteed loans
by) the Bank. An analysis of such activities follows (in thousands):
1999 1998
-------- --------
Balance, January 1.......................................... $3,306 $4,450
New loans and advances.................................... 1,646 3,127
Repayments (excluding renewals)........................... (1,267) (4,271)
------ ------
Balance, December 31........................................ $3,685 $3,306
====== ======
The loans analyzed above were made in the normal course of business at
prevailing interest rates and terms.
12. DIVIDEND RESTRICTIONS
The Company's primary source of funds is dividends it receives from the
Bank. The payment of dividends by the Bank, in turn, is subject to the
regulations of the Comptroller of the Currency, which require, among other
things, that dividends be paid only from net profits of the current and
immediately preceding two years. At December 31, 1999, the Bank had
approximately $3,477,000 of retained earnings available for dividends to the
Company without being required to seek special regulatory approvals.
13. EQUITY
DIVIDENDS DECLARED
During 1999, 1998 and 1997, the Company declared cash dividends of $.20,
$.20 and $.14 per share, respectively.
COMMON STOCK
During February 1999, the Company sold 1,250,000 shares of common stock
resulting in proceeds of approximately $11.4 million, net of underwriting
discount and expenses.
On July 15, 1997, the Company issued 968,960 shares of common stock at $7
per share.
14. STOCK BASED COMPENSATION
STOCK OPTIONS
The Company has long-term incentive plans that provide stock-based awards,
including stock options to certain key employees. The terms of the
Performance-Based Incentive Plan ("the Plan"), which were approved by
shareholders at the annual meeting in April 1998, allow for a maximum grant of
540,000 shares. Prior to the approval of the Plan, there were issued and
outstanding options totaling 166,766 of which 1,200 were exercised in 1999.
There are 134,900 shares remaining to be issued under the Plan as of
December 31, 1999. Generally, the options granted under the Plan become
exercisable 33% in each year following the year of grant, and expire ten years
after the date of the grant. The grant price of all options has been equal to
the estimated fair market value of a share of stock as of the date of grant.
45
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK BASED COMPENSATION (CONTINUED)
Options outstanding and the activity for December 31, 1999, 1998 and 1997
are presented below:
1999 1998 1997
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES GRANT PRICE SHARES GRANT PRICE SHARES GRANT PRICE
-------- ----------- -------- ----------- -------- -----------
Employee stock option plans:
Outstanding at beginning of year...... 359,766 $6.26 166,766 $4.32 149,016 $3.75
Options granted..................... 214,600 9.92 193,000 7.93 34,000 7.00
Options exercised................... 1,800 5.00 -- -- 14,550 4.82
Options forfeited................... 20,000 8.00 -- -- 1,700 4.00
------- ----- ------- ----- ------- -----
Outstanding at end of year............ 552,566 $7.63 359,766 $6.26 166,766 $4.32
======= ===== ======= ===== ======= =====
Options exercisable at year-end......... 258,466 $5.90 184,500 $4.98 121,374 $3.99
======= ===== ======= ===== ======= =====
Weighted-average fair value of options
granted during the year............... $ 2.59 $ 1.98 $ 2.05
======= ======= =======
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock
option and award plans and has adopted the disclosure-only option under SFAS
No. 123, "Accounting for Stock-Based Compensation." If the Company had adopted
the accounting provisions of SFAS 123 and recognized expense for the fair value
of employee stock options granted in 1999, 1998 and 1997, over the vesting life
of the options, pro forma net income would be as indicated below (dollars in
thousands, except per share data):
AS REPORTED PRO FORMA
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Net income.................................. $2,941 $2,679 $2,975 $2,658 $2,634 $2,973
Basic earnings per common share............. $ 0.49 $ 0.55 $ 0.69 $ 0.44 $ 0.54 $ 0.69
Diluted earnings per common share........... $ 0.48 $ 0.55 $ 0.68 $ 0.44 $ 0.54 $ 0.67
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the fair
value of traded options, which have different characteristics than employee
stock options, and changes to the subjective assumptions used in the model can
result in materially different fair value
46
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK BASED COMPENSATION (CONTINUED)
estimates. The weighted-average grant date fair values of the options granted
during 1999, 1998 and 1997 were based on the following assumptions:
RISK-FREE
INTEREST RATES DIVIDEND YIELD
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Performance-Based Incentive and
other stock option plans...... 5.89% 4.62% 5.89% 2.03% 2.50% 2.86%
EXPECTED LIVES VOLATILITY
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Performance-Based Incentive and
other stock option plans................. 6 years 6 years 8 years 0.20% 0.25% 0.25%
Compensation expense under the fair value-based method is recognized over
the vesting period of the related stock options. Accordingly, the pro forma
results of applying SFAS No. 123 in 1999, 1998 and 1997 may not be indicative of
future amounts.
The following table summarizes information about stock options outstanding
at December 31, 1999.
OUTSTANDING EXERCISABLE
------------------------------- -------------------
AVERAGE AVERAGE
EXERCISE AVERAGE EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- ----------- -------- -------- --------- -------- --------
$3.06-$3.64.................. 49,226 1.59 $3.22 49,226 $ 3.22
$4.00-$4.68.................. 67,108 6.54 4.14 67,108 4.14
$5.00-$8.00.................. 222,232 8.87 7.59 128,132 7.40
$9.00-$10.25................. 214,000 9.42 9.94 14,000 10.00
------- ---- ----- ------- ------
Total...................... 552,566 8.15 $7.69 258,466 $ 5.90
======= ==== ===== ======= ======
RESTRICTED STOCK
The Company has awarded 17,500 shares of restricted stock under the
Performance-Based Incentive Plan (6,250 shares have vested in 1999). The
weighted average grant price of restricted stock granted and vested during 1999
was $9.75 and $8.00, respectively.
15. EMPLOYEE BENEFITS
PROFIT-SHARING PLAN
The Company sponsors a 401(k) profit-sharing plan in which substantially all
full-time employees are eligible to participate. This plan allows eligible
employees to defer a portion of their salaries on a pretax basis. The Company
matches these deferrals on a pro rata basis as defined in the plan.
Contributions and administrative expenses related to the plan totaled
approximately $100,000, $99,000 and $84,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
47
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFITS (CONTINUED)
HEALTH AND WELFARE PLAN
The Company also provides health care and life insurance benefits to all
employees through Florida Bankers Insurance Trust. Total cost related to these
benefits for 1999, 1998 and 1997 were approximately $453,000, $354,000 and
$319,000, respectively.
16. CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined) and
of Tier I capital (as defined) to average assets (as defined). If such minimum
amounts and ratios are met, the Bank is considered "adequately capitalized." If
a bank exceeds the requirements of "adequately capitalized" and meets even more
stringent minimum standards, it is considered to be "well capitalized."
Management believes that as of December 31, 1999 and 1998, the Bank meets and
exceeds all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Bank's
regulatory agency categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. There have
48
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CAPITAL (CONTINUED)
been no conditions or events since that notification that management believes
have changed the institution's category.
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- ----------- -------- ----------- --------
As of December 31, 1999:
Total capital (to risk-weighted assets):
Consolidated................................... $45,096 17.3% $20,942 8.0% $26,178 10.0%
Bank........................................... 36,797 14.0% 21,018 8.0% 26,273 10.0%
Tier I capital (to risk-weighted assets):
Consolidated................................... 42,425 16.2% 10,471 4.0% 15,707 6.0%
Bank........................................... 34,126 13.0% 10,509 4.0% 15,764 6.0%
Tier I capital (to average assets):
Consolidated................................... 42,425 12.7% 13,363 4.0% 16,704 5.0%
Bank........................................... 34,126 10.3% 13,219 4.0% 16,523 5.0%
As of December 31, 1998:
Total capital (to risk-weighted assets):
Consolidated................................... 30,987 16.6% 14,916 8.0% 18,645 10.0%
Bank........................................... 24,122 12.8% 15,117 8.0% 18,896 10.0%
Tier I capital (to risk-weighted assets):
Consolidated................................... 29,112 15.6% 7,458 4.0% 11,187 6.0%
Bank........................................... 22,247 11.8% 7,558 4.0% 11,337 6.0%
Tier I capital (to average assets):
Consolidated................................... 29,112 9.7% 12,009 4.0% 15,011 5.0%
Bank........................................... 22,247 7.4% 11,978 4.0% 14,972 5.0%
17. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The financial statements do not reflect various commitments and contingent
liabilities, or off-balance sheet risks, that arise in the normal course of
business to meet the financing needs of customers. These include commitments to
extend credit and to honor standby letters of credit. These instruments involve,
to varying degrees, elements of credit, interest rate, and liquidity risks in
excess of amounts reflected in the balance sheets. The extent of the Bank's
involvement in these commitments or contingent liabilities is expressed by the
contractual, or notional, amounts of the instruments.
The Company's maximum exposure to credit loss under standby letters of
credit and commitments to extend credit is represented by the contractual amount
of those instruments. The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash
49
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
requirements. The amount of collateral obtained, if any, is based on
management's credit evaluation in the same manner as though an immediate credit
extension were to be granted. Commitments to extend credit amount to
approximately $52,000,000 and $26,000,000 at December 31, 1999 and 1998,
respectively.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities. The Company had approximately $4,156,000 and
$2,022,000 of standby letters of credit outstanding at December 31, 1999 and
1998, respectively. The Company does not anticipate any material losses as a
result of participating in standby letters of credit or commitments to extend
credit.
CONCENTRATIONS OF CREDIT RISK
The Bank originates residential and commercial real estate loans and other
consumer and commercial loans primarily in the north Florida area. In addition,
the Bank occasionally purchases loans, primarily in Florida. Although the Bank
has a diversified loan portfolio, a substantial portion of its borrowers'
ability to repay their loans is dependent upon economic conditions in the Bank's
market area.
FEDERAL RESERVE REQUIREMENT
The Federal Reserve Board requires that certain banks maintain reserves,
based on their average deposits, in the form of vault cash and average deposit
balances at a Federal Reserve Bank. The requirement as of December 31, 1999 and
1998 was approximately $6.8 million and $3.7 million, respectively.
LEGAL CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial condition, operations, or liquidity
of the Company.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items include
cash and due from banks, interest-bearing deposits with other banks, federal
funds sold, and securities sold under repurchase agreements. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. The resulting fair values may be
significantly affected by the assumptions used, including the discount rates and
estimates of future cash flows.
50
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The methods and assumptions used to estimate the fair value of the Company's
other financial instruments are as follows:
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices.
If a quoted market price is not available, fair value is estimated using
market prices for similar securities.
LOANS
The loan portfolio is segregated into categories and the fair value of
each loan category is calculated using present value techniques based on
projected cash flows and estimated discount rates. The calculated present
values are then reduced by an allocation of the allowance for loan losses
against each respective loan category.
DEPOSITS
The fair values of noninterest-bearing deposits, NOW accounts, money
market accounts, and savings accounts are the amounts payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for deposits of similar
remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The estimated fair values for other financial instruments and
off-balance sheet loan commitments are considered to approximate carrying
amounts at December 31, 1999 and 1998.
The Company's financial instruments which have estimated fair values
differing from their respective carrying values are presented as follows at
December 31, 1999 and 1998 (in thousands):
1999 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Financial assets:
Investment securities held to
maturity........................ $ 10,582 $ 9,917 $ 2,940 $ 2,944
Net loans......................... $263,413 $261,910 $185,140 $185,780
Financial liabilities:
Time deposits..................... $133,990 $134,046 $136,913 $136,283
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 financial instruments at December 31, 1999, the estimated
fair values would necessarily have been achieved at that date, since market
values may differ depending on various circumstances. The estimated fair values
at December 31, 1999 would not necessarily be indicative of fair values at
future dates.
51
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Assets
Cash and cash equivalents................................... $ 4,187 $ 6,005
Investment in CNB National Bank............................. 34,670 23,913
Other assets................................................ 4,218 988
------- -------
Total assets............................................ $43,075 $30,906
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Other liabilities......................................... $ -- $ 10
------- -------
Total liabilities....................................... -- 10
------- -------
Shareholders' equity
Common stock.............................................. 61 49
Additional paid-in capital................................ 30,805 19,465
Retained earnings......................................... 12,746 10,964
Accumulated other comprehensive (loss) income, net of
taxes................................................... (537) 418
------- -------
Total shareholders' equity.............................. 43,075 30,896
------- -------
Total liabilities and shareholders' equity.............. $43,075 $30,906
======= =======
52
STATEMENT OF INCOME
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Dividend income............................................. $1,679 $1,853 $1,913
Interest income............................................. 298 328 195
Interest expense............................................ -- (7) (169)
------ ------ ------
Net interest and dividend income............................ 1,977 2,174 1,939
Noninterest expense, net.................................... (1,016) (110) (40)
------ ------ ------
Income before income taxes and equity in undistributed net
income of subsidiary...................................... 961 2,064 1,899
Income tax benefit (provision).............................. 268 (79) 5
------ ------ ------
Income before equity in undistributed net income of
subsidiary................................................ 1,229 1,985 1,904
Equity in undistributed net income of subsidiary............ 1,712 694 1,071
------ ------ ------
Net income.................................................. $2,941 $2,679 $2,975
====== ====== ======
53
STATEMENT OF CASH FLOWS
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 2,941 $ 2,679 $ 2,975
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed earnings of subsidiary.................... (1,712) (694) (1,071)
Non-cash compensation................................... 71 -- --
Changes in assets and liabilities:
Other assets.......................................... (1,891) (135) 27
Other liabilities..................................... (10) -- (14)
-------- ------- -------
Net cash (used in) provided by operating
activities........................................ (601) 1,850 1,917
-------- ------- -------
Cash flows from investing activities:
Cash paid related to investment in subsidiary............. (10,000) -- --
Cash paid related to land purchase........................ (1,339) (677) --
-------- ------- -------
Cash flows from financing activities:
Payments on notes payable................................. -- (1,450) (1,200)
Cash dividends............................................ (1,159) (971) (620)
Proceeds from issuance of common stock.................... 11,377 -- 6,812
Payment to repurchase common stock........................ (96) -- --
-------- ------- -------
Net cash provided by (used in)financing
activities........................................ 10,122 (2,421) 4,992
-------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (1,818) (1,248) 6,909
Cash and cash equivalents, beginning of year................ 6,005 7,253 344
-------- ------- -------
Cash and cash equivalents, end of year...................... $ 4,187 $ 6,005 $ 7,253
======== ======= =======
54
PART III
Except for the information relating to the Company's executive officers and
its key employees, the material required by items 10 through 13 is hereby
incorporated by reference from the Company's definitive proxy statement pursuant
to Instruction G of Form 10-K. The Company will file its definitive Proxy
Statement with the Commission prior to April 15, 2000.
EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
- ---------------------
3(i) Articles of Incorporation (Incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement
No. 33-71082, as amended, on Form S-4 filed
February 8,1994).
3(ii) By-laws (Incorporated by reference to Exhibit 3.4 to the
Company's Registration Statement No. 33-71082, as amended,
on Form S-4 filed February 8, 1994).
10 Bennett Brown Employment Agreement (Incorporated by
reference to Exhibit 10 of the Company's June 30, 1999 10-Q
filed on August 16, 1999).
10(i) K. C. Trowell Employment Agreement (Incorporated by
reference to Exhibit 10(i) to the Company's Pre-Effective
Amendment No. 1 to its Registration Statement on Form S-2
filed as of January 26, 1999).
10(ii) G. Thomas Frankland Employment Agreement (Incorporated by
reference to Exhibit 10 (ii) to the Company's Pre-Effective
Amendment No. 1 to its Registration Statement on Form S-2
filed as of January 26, 1999).
10(iii) 1998 Performance-Based Incentive Plan (Incorporated by
reference to Exhibit 99 to the Company's Registration
Statement on Form S-8 filed December 7, 1998).
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen, LLP, independent certified
public accountants.
27 Financial Data Schedule.
REPORT OF FORM 8-K:
a) On January 13, 1999, the Company filed a Form 8-K to report
the unaudited 1998 results.
b) On March 16, 1999, the Company filed a Form 8-K to report
the resignation of Corey J. Coughlin as President and Chief
Operating Officer of CNB National Bank and Executive Vice
President of CNB Florida Bancshares, Inc. and the hiring of
Bennett Brown as President and Chief Operating Officer of
CNB National Bank and Executive Vice President of CNB
Florida Bancshares, Inc.
c) On May 19, 1999, the Company filed a Form 8-K to report the
approval of its shareholders to change the name of the
Company to CNB Florida Bancshares, Inc.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CNB FLORIDA BANCSHARES, INC.
(Registrant)
By: /s/ G. THOMAS FRANKLAND
-----------------------------------------
G. Thomas Frankland
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS R. ANDREWS
------------------------------------------- Director March 24, 2000
Thomas R. Andrews
/s/ AUDREY S. BULLARD
------------------------------------------- Director March 24, 2000
Audrey S. Bullard
/s/ RAYMON J. LAND
------------------------------------------- Director March 24, 2000
Raymon J. Land
/s/ MARVIN H. PRITCHETT
------------------------------------------- Director March 24, 2000
Marvin H. Pritchett
/s/ WILLIAM J. STREICHER
------------------------------------------- Director March 24, 2000
William J. Streicher
/s/ K. C. TROWELL
------------------------------------------- Director March 24, 2000
K. C. Trowell
Executive Vice President
/s/ G. THOMAS FRANKLAND and Chief Financial
------------------------------------------- Officer (Principal March 24, 2000
G. Thomas Frankland Financial Officer)
/s/ MARTHA S. TUCKER Sr. Vice President and
------------------------------------------- Controller (Principal March 24, 2000
Martha S. Tucker Accounting Officer)
56