UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 31, 2001
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
CNB Florida Bancshares, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-2958616
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9715 Gate Parkway North
Jacksonville, Florida 32246
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 997-8484
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.
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 15, 2002 was $9.70.
The number of shares of the Registrant's common stock outstanding as of March
15, 2002 was 6,097,953 shares, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's 2002 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 30, 2002.
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. Factors that may cause such differences include, but are not limited
to, increased competitive pressures among depository and other financial
institutions, changes in the interest rate environment that may reduce margins,
general economic or business conditions in the Company's markets that lead to a
deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. 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 was
formed in 1986. The Company relocated its headquarters from Lake City, Florida
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 fifteen full service branches located
within the following contiguous counties in Northeast Florida: Alachua, Baker,
Bradford, Columbia, Duval, St. Johns, Suwannee and Union County. At December 31,
2001, the Company had total assets of $612.0 million, total gross loans of
$521.6 million, total deposits of $532.9 million, and total shareholders' equity
of $46.7 million. Net income for the years ended December 31, 2001, 2000 and
1999 was $2.9 million, $2.5 million and $2.9 million, respectively.
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"). Historically the
Company competed successfully in Columbia, Suwannee, Baker, Bradford and Union
Counties (the "Core Markets"), 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, Bank of America Corporation
formerly known as NationsBank Corporation 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
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Barnett closely followed the acquisition of three of Jacksonville's five
community banks by SouthTrust Bank Corporation ("SouthTrust") and Compass
Bancshares, Inc. ("Compass") in 1996 and 1997. Similarly, Gainesville State
Bank, the largest community bank in Gainesville and 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, Bank of America, Wachovia, SouthTrust, AmSouth
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 the customer bases 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 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
3
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 four operating divisions: the
Southern Division (Alachua County), the TriCounty Division (Baker, Bradford and
Union counties), the Suwannee Valley Division (Columbia and Suwannee Counties)
and the First Coast Division (Duval and St. Johns Counties). This 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.
DEPOSIT PRODUCTS AND SERVICES
The Company, through its banking subsidiary, 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, bundled account products including the Generations
Gold(TM) affinity program, 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 also offers internet banking services, which
allow customers to check balances, transfer funds and pay bills on-line. 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. The FDIC
insures all deposits up to the maximum amount permitted by law (generally
$100,000 per depositor subject to aggregation rules).
LOAN PRODUCTS AND LENDING POLICY
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 using a tiered
schedule that grants authority to officers based on certain risk parameters
including the collateral type. The Executive Loan Committee must approve loans
exceeding officer authority and exhibiting certain risk parameters. Exceptions
to the policy must be recommended by the applicable officer and approved by
either a Division President or the Credit Administrator within their authority
and approved by the Executive Loan Committee of the Bank's Board of Directors.
COMMERCIAL LOANS
Commercial loan products include short-term loans and lines of credit for
working capital purposes. These loans are generally secured by the borrower's
current assets, typically accounts receivables and inventory. Other commercial
loan products include intermediate term loans for farm and non-farm equipment,
crop loans and SBA guaranteed loans. SBA guaranteed loans include secured and
unsecured loans for working capital, business expansion and purchases of
equipment and machinery.
Lines of credit are subject to annual review and approval, generally no later
than 120 days after the closing of the customer's fiscal year-end. Advances are
typically limited to 75% of eligible accounts receivable and up to 50% on
inventory. These credits are usually monitored through the review of a
receivables aging report and borrowing base report.
4
Term loans having maturities greater than one year are generally secured by
equipment or rolling stock with advances limited to no more than 75% 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 provide 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 20% of the total project costs. Such loans
typically mature within thirty 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. Credit cards are
originated in conjunction with a separate financial institution through which
the company has a contractual relationship. Credit decisions and credit risk are
handled entirely by the third party institution. The Company continues to carry
the receivables on card balances generated prior to the initiation of this
relationship.
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%
is generally considered unacceptable. For automobile loans, the policy requires
a minimum down payment of 10% with maturities based on the age of the vehicle.
The Company offers a variety of 1-4 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 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
5
value ratio of 80% or less, where the value is equal to the lesser of the cost
or the appraised value. A higher loan to value ratio is available when private
mortgage insurance can be obtained. Most 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 is independent of the loan production and
administration process. The loan review officer has the responsibility to
perform timely reviews of portfolio credits with 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. Additionally, a comprehensive annual review is conducted
on all credits over $750,000, past dues, non-performing assets and other real
estate owned. Loan operations personnel review smaller credits utilizing
pre-determined standards, which include documentation and compliance, with
exceptions referred to the loan review officer. Problem credits, which include
all non-performing assets, are reviewed at least quarterly with written
documentation that includes the reason for the problem, collateral support, a
plan for resolution of the problem and a time frame for the resolution.
Delinquent loans are reviewed at least weekly and monitored by the Board of
Directors of the Bank.
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 trends, historical loan losses and current economic
trends.
INVESTMENT SERVICES
During 2001, the Company launched its CNB Financial Services unit, which is
geared toward offering customers an alternative investment vehicle to bank
products. These services are being offered through a relationship with Raymond
James and are being sold through brokers who are employed by the Bank. It is
expected that this business line will offer complementary alternatives to
customer funds and will allow the Bank to continue earning fee income on
relationships that may have otherwise left the Bank. Customer balances related
to CNB Financial Services are not recorded in the financial statements of the
Company since the accounts are held with Raymond James. The Company earns fees
based upon the level of funds invested with Raymond James that were originated
through CNB Financial Services. This business unit is in the start-up phase and
did not materially contribute to the Company's results of operations during
2001.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability policy is carried out through the Bank's risk
management function. The Bank manages asset growth, liquidity and capital in
order to maximize income and reduce interest rate risk. The risk management
group reviews and discusses 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 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 consist primarily of Federal Reserve Bank and Federal Home Loan Bank
stock that are required for the Bank to be a member of, and to conduct business
with, such institutions. Dividends on such investments are determined by the
institutions and are payable semi-annually or quarterly.
6
COMPETITION
Within each market in which the Company operates (collectively, 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 1990 opened its first de novo
branch in Fort White. In 1992 and 1993, the Bank acquired additional banking
offices in Macclenny, Lake City and Live Oak from Anchor Savings Bank. 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, Florida. 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, Florida and two 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. The Bank opened its second
Jacksonville branch in February 2001, and opened a St. Augustine branch in June
2001. In May 2001, the Bank purchased the Lake City and Live Oak branches of
Republic Bank. In connection with the transaction, the Bank closed one of its
existing Live Oak locations.
EMPLOYEES
As of December 31, 2001, the Bank had 246 full-time equivalent employees. The
Company's operations are conducted through the Bank and, consequently, the
Company does not have any separate employees.
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 of
Governors (the "Federal Reserve") 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
Federal Deposit Insurance Corporation (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
7
regulations that affect the Company and the Bank.
The Holding Company is regulated by the Federal Reserve under the BHC Act
which requires every bank holding company to obtain the prior approval of the
Federal Reserve before acquiring more than 5% of the voting shares of any bank
or all or substantially all of the assets of a bank, and before merging or
consolidating with another bank holding company. The Federal Reserve (pursuant
to regulation and published policy statement) has maintained that a bank holding
company must serve as a source of financial strength to its subsidiary banks. In
adhering to the Federal Reserve policy, the Holding Company may be required to
provide financial support for a subsidiary bank at a time where absent such
Federal Reserve policy, the Holding Company may not deem it advisable to provide
such assistance.
Until March 2000, a bank holding company was generally prohibited from
acquiring control of any company which was not a bank and from engaging in any
business other than the business of banking or managing and controlling banks.
In April 1997, the Federal Reserve revised and expanded the list of permissible
non-banking activities in which a bank holding company could engage. However,
limitations continue to exist under certain laws and regulations. The
Gramm-Leach-Bliley Act repeals certain regulations pertaining to bank holding
companies and eliminates many of the previous prohibitions. Specifically, Title
I of the Gramm-Leach-Bliley Act repeals Sections 20 and 32 of Glass-Steagall Act
(12 U.S.C. 377 and 78, respectively) and is intended to facilitate affiliations
among banks, securities firms, insurance firms and other financial companies. To
further this goal, the Gramm-Leach-Bliley Act amends Section 4 of the BHC Act
(12 U.S.C. 1843) to authorize bank holding companies and foreign banks that
qualify as "financial holding companies" to engage in securities, insurance and
other activities that are financial in nature or incidental to a financial
activity. The activities of bank holding companies that are not financial
holding companies will continue to be limited to activities authorized currently
under the BHC Act, such as activities that the Federal Reserve previously has
determined in regulations and orders issued under section 4(c)(8) of the BHC Act
to be closely related to banking and permissible for bank holding companies.
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 10% of the total
amount of deposits of insured depository institutions in the United States and
less than 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. Florida does not
prohibit interstate branching within the state. 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, 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 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 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%.
8
The Company's Tier 1 and total risk-based capital ratios under these guidelines
at December 31, 2001, were 8.0% and 9.0%, 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, 2001 was 6.5%. 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 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.
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 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 of dividends.
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 policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank.
9
PROPERTIES
The Bank currently operates out of fifteen branch offices and a non-customer
operations center. All branches have automated teller machines ("ATMs"). The
Company owns the following properties:
APPROXIMATE SQUARE YEAR ESTABLISHED/
OFFICE LOCATION FOOTAGE ACQUIRED
- ------------------------------------------------------------ ------------------ -----------------
LAKE CITY (COLUMBIA COUNTY)
201 North Marion Street (1) ......................... 22,000 1986
145 West Baya Avenue ................................ 10,100 1993
4420 U.S. 90 West ................................... 2,900 1997
100 North First Street .............................. 7,600 2001
1 CNB Place, East U.S. 90 (2) ....................... 20,800 1996
LIVE OAK (SUWANNEE COUNTY)
205 White Avenue, S.E. ............................. 6,000 1988
1562 South Ohio Avenue .............................. 2,000 1993
535 South Ohio Avenue .............................. 8,000 2001
FORT WHITE (COLUMBIA COUNTY)
Highway 27 .......................................... 2,200 1990
MACCLENNY (BAKER COUNTY)
595 South Sixth Street .............................. 4,800 1992
STARKE (BRADFORD COUNTY)
606 West Madison Street ............................. 8,000 1994
GAINESVILLE (ALACHUA COUNTY)
5027 Northwest 34th Street .......................... 2,000 1996
7515 West University Avenue ......................... 12,000 2000
11411 N. State Rd. 121 .............................. 4,500 1996
LAKE BUTLER (UNION COUNTY)
300 West Main Street ................................ 6,800 1996
JACKSONVILLE (DUVAL COUNTY)
9715 Gate Parkway North ............................. 26,000 2000
ST. AUGUSTINE (ST. JOHNS COUNTY)
1980 U.S. 1 South .................................. 5,000 2000
- -------------------------
(1) Main office.
(2) Location of the operations center.
10
The Company is currently leasing a branch in the Mandarin area of
Jacksonville (Duval County), which opened in February 2001. The Company also
owns 1.57 acres of unimproved land in Glen St. Mary, Florida that was acquired
in 2001. The land will be used for the construction of a branch banking facility
that is expected to open in late 2002.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of their properties are subject; nor are there material
proceedings known to be contemplated by any governmental authority; nor are
there material proceedings known to the Company, pending or contemplated, in
which any director, officer, affiliate or any principal security holder of the
Bank or the Company, or any associate of any of the foregoing is a party or has
an interest adverse to the Company.
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.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
K. C. Trowell 63 Mr. Trowell is Chairman, Chief Executive Officer
and President 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 30
years. He has also held management positions with
Bank of America in 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 55 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, the Fisher School of Accounting
Steering Committee and the North Florida Land
Trust.
11
Martha S. Tucker 51 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 34 years of banking
experience. She is a member of the Altrusa Club
and the Suwannee County Chamber of Commerce.
Lloyd D. Adams 54 Mr. Adams serves as the President of the Suwannee
Valley Division of the Bank, consisting of the
Columbia and Suwannee markets. Having joined CNB
in May 1998, he has 28 years of experience,
primarily in business banking. A native of the
area, Mr. Adams is a recognized community leader.
He is a graduate of Florida State University,
Florida School of Banking and the ABA Commercial
Lending Graduate School in Norman, Oklahoma.
Robert E. Cameron 57 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 32 years. Currently he is a
member of the Board of Directors of the
Gainesville Builders Association and Child Care
Resources.
John D. Kennedy 45 Mr. Kennedy has served as the TriCounty 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. Mr. Kennedy serves on
the Lake City Community College Endowment Trust
Board. He is a member of the Board of Directors
of Baker County Council on Aging and Baker County
Tip-Off Club. He is also Chairman of the Baker
County Education Foundation and President of the
Girls Softball League of Baker County. Mr.
Kennedy has 29 years of banking experience.
David H. Sheffield 38 Mr. Sheffield serves as the First Coast Division
President overseeing banking activities in Duval
and St. Johns counties. Mr. Sheffield joined CNB
National Bank in 1999. He has 16 years of banking
experience in the Jacksonville market, primarily
in the commercial lending functional area. Mr.
Sheffield began his career with Florida National
Bank in 1986 and has held positions with
Enterprise National Bank of Jacksonville and
Compass Bank in various lending and management
capacities. Mr. Sheffield is a graduate of
Clemson University with a B.S. in Financial
Management. He is also a graduate of the ABA
Commercial Lending Graduate School at the
University of Oklahoma and the Graduate School of
Banking at Louisiana State University. He is
actively involved in various community and
industry organizations and is active as an elder
at his church.
Suzanne M. Norris 38 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 16 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
12
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 15, 2002, there were 6,097,953
shares of Common Stock issued and outstanding, and 518,838 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 two
fiscal years.
Shareholders' equity at December 31, 2001 was $46.7 million, as compared to
$44.6 million at December 31, 2000. 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 2000 and 2001 consisted of the payment of quarterly
cash dividends in the amount of $0.05 per common share.
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 include interest
payments on outstanding long-term debt and 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, subject to certain borrowing
covenants outlined in the Company's line of credit agreement, as amended,
entered into with another bank during 2001 (see Management's Discussion and
Analysis - Item 7 of Part II). 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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997
-------------- --------------- -------------- -------------- --------------
dollars in thousands except per share information.
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
Interest Income $ 40,417 $ 32,061 $ 23,758 $ 21,119 $ 19,420
Interest Expense (19,629) (14,736) (9,052) (9,417) (8,663)
----------- ----------- ----------- ------------ ------------
Net Interest Income 20,788 17,325 14,706 11,702 10,757
Provision for Loan Loss (2,050) (1,350) (1,160) (710) (440)
----------- ----------- ----------- ------------ ------------
Net Interest Income After
Provision for Loan Losses 18,738 15,975 13,546 10,992 10,317
Non-Interest Income 5,633 3,338 2,952 2,392 2,153
Non-Interest Expense (19,836) (15,481) (11,994) (9,298) (7,914)
----------- ----------- ----------- ------------ ------------
Income Before Taxes 4,535 3,832 4,504 4,086 4,556
Income Taxes (1,594) (1,325) (1,563) (1,407) (1,581)
----------- ----------- ----------- ------------ ------------
Net Income $ 2,941 $ 2,507 $ 2,941 $ 2,679 $ 2,975
=========== =========== =========== ============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE: (1)
Basic Earnings $ 0.48 $ 0.41 $ 0.49 $ 0.55 $ 0.69
Diluted Earnings 0.48 0.41 0.48 0.55 0.68
Book Value 7.64 7.32 7.04 6.36 5.98
Dividends 0.20 0.20 0.20 0.20 0.14
Actual Shares Outstanding 6,106,453 6,099,376 6,116,070 4,856,770 4,856,770
Basic Weighted Average Shares Outstanding 6,094,670 6,095,471 5,995,474 4,856,770 4,327,534
Diluted Weighted Average Shares Outstanding 6,188,477 6,134,270 6,069,737 4,897,922 4,406,616
- ------------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS:
Return on Average Assets 0.53% 0.62% 0.91% 0.93% 1.14%
Return on Average Shareholders' Equity 6.43% 5.74% 7.03% 8.92% 12.38%
Dividend Payout 41.67% 48.78% 40.82% 36.36% 20.29%
Efficiency Ratio 75.08% 74.92% 67.92% 65.97% 61.30%
Total Risk-Based Capital Ratio 9.00% 12.00% 17.25% 16.62% 18.67%
Average Shareholders' Equity to
Average Assets 8.23% 10.82% 13.01% 10.43% 9.22%
Tier 1 Capital to Average Assets/Leverage Ratio 6.50% 9.80% 12.70% 9.70% 10.20%
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION AT YEAR END:
Assets $ 612,021 $ 467,593 $ 346,076 $ 311,565 $ 273,331
Gross Loans 521,555 380,821 266,084 187,015 159,649
Deposits 532,891 367,686 288,203 265,109 231,444
Other Borrowings 28,148 51,142 12,063 12,570 9,157
Shareholders' Equity 46,669 44,636 43,075 30,896 29,025
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Banking Locations 15 12 12 11 11
Full-Time Equivalent Employees 246 212 183 149 144
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Per share data reflects a two-for-one stock split effective August 17, 1998.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
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. Factors that may cause such differences include, but are not limited
to, increased competitive pressures among depository and other financial
institutions, changes in the interest rate environment that may reduce margins,
general economic or business conditions in the Company's markets that lead to a
deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. 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.
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 that affect the Company's
financial condition and earnings performance, and how the Company's performance
during 2001 compares with prior years. Throughout this section, CNB Florida
Bancshares, Inc. and its subsidiary, CNB National Bank, are referred to as "CNB"
or "the Company".
On January 29, 1999, CNB completed its initial public offering and its
common stock began trading on the NASDAQ National Market, giving CNB
shareholders greater access to purchasing or selling shares of common stock. 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.
The Company is pleased with the progress made toward its strategic growth
initiatives in 2001. Expansion activities were completed with the opening of a
second Jacksonville branch (Mandarin) in the first quarter of 2001 and the
opening of the St. Augustine branch (US 1 and SR 312) in the second quarter of
2001. On May 11, 2001, the Bank purchased the Lake City and Live Oak branches of
Republic Bank. The Bank acquired loans, deposits and premises and equipment of
approximately $12 million, $62 million and $2 million, respectively. The Bank
also recorded a core deposit intangible of $6 million, which is being amortized
over its estimated life of 10 years. The Bank completed the purchase of
unimproved land located on US 90 in Glen St. Mary in August 2001 with plans of
opening a new branch in late 2002. With the conversion to an improved data
processing platform during the fourth quarter of 2000 and the move into the
expanded Operations Center in the first half of 2001, operational support to our
growth initiatives will become more customer focused and cost-efficient.
The Company officially relocated its corporate offices to Jacksonville,
Florida effective January 2001. Operational headquarters for CNB National Bank
15
continue to be located in Lake City.
Results of Operations
For 2001, the Company's earnings were $2.9 million, or $0.48 per diluted
share, compared to $2.5 million, or $0.41 per diluted share, and $2.9 million,
or $0.48 per diluted share, in 2000 and 1999, respectively. These results
reflect growth in net interest income and non-interest income. Non-interest
expenses continue to reflect the Company's strategy to expand the CNB franchise
into new markets. Total assets increased to $612.0 million at December 31, 2001
compared to $467.6 million at December 31, 2000, an increase of 31%. Included in
the results for 2001 is the impact of the acquisition of the Lake City and Live
Oak branches of Republic Bank in May 2001.
Net Interest Income/Margins
Net interest income is the single largest source of revenue for the Bank
and consists of interest and fee income generated by earning assets, less
interest expense paid on interest bearing liabilities. The Company's main
objective is to manage its assets and liabilities to provide the largest
possible amount of income while balancing interest rate, credit quality,
liquidity and capital risks. Net interest income was $20.8 million for 2001,
compared to $17.3 million and $14.7 million for the comparable prior year
periods of 2000 and 1999, respectively. The increases were due to loan and
deposit growth, partially offset by the impact of lower rates during 2001.
Average loan growth in 2001 of 47% contributed to a $8.4 million, or 26%
increase in interest income over 2000. Increases in time, money market and
interest bearing deposits, including those accounts acquired from Republic Bank,
were the main contributors in the $135.9 million, or 44%, growth in average
interest bearing liabilities.
The Company's net interest margin decreased to 4.09% in 2001, compared to
4.75% in 2000. The decline in the margin is reflective of a drop in the federal
funds overnight borrowing rate of 475 basis points in 2001 coupled with an
increase in higher-cost deposits. Table 1 presents a comparative earning asset
composition as well as earning asset yields and interest bearing liability rates
for 2001, 2000 and 1999. Table 1a shows the changes in net interest income by
category due to shifts in volume and rates for years presented.
16
Table 1: Average Balances - Yields and Rates
December 31, 2001 December 31, 2000 December 31, 1999
------------------------------- ------------------------------- -------------------------------
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 $ 2,773 $ 102 3.68 % $ 3,429 $ 208 6.07 % $ 13,285 $ 643 4.84 %
Investment Securities
Available for Sale 33,167 1,864 5.62 33,314 2,110 6.33 45,082 2,671 5.92
Investment Securities
Held to Maturity 6,278 384 6.12 9,869 572 5.80 9,151 504 5.51
Loans (1) 465,551 38,055 8.17 317,491 29,112 9.17 215,861 19,412 8.99
Interest Bearing Deposits 401 12 2.99 895 59 6.59 10,533 528 5.01
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
TOTAL EARNING ASSETS 508,170 40,417 7.95 364,998 32,061 8.78 293,912 23,758 8.08
All Other Assets 47,705 38,278 27,543
--------- --------- ---------
TOTAL ASSETS $555,875 $403,276 $321,455
========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $148,026 3,899 2.63 % $110,387 3,731 3.38 % $ 80,132 1,749 2.18 %
Savings 18,707 196 1.05 17,095 238 1.39 17,445 245 1.40
Time Deposits 235,010 13,656 5.81 151,674 9,019 5.95 131,548 6,731 5.12
Federal Funds Purchased and
Repurchase Agreements 14,609 552 3.78 9,565 572 5.98 6,947 327 4.71
Short Term Borrowings 20,932 1,061 5.07 17,377 1,176 6.77 - - -
Other Borrowings 4,667 265 5.68 - - - - - -
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
TOTAL INTEREST BEARING
LIABILITIES 441,951 19,629 4.44 306,098 14,736 4.81 236,072 9,052 3.83
Demand Deposits 64,337 49,418 40,761
Other Liabilities 3,838 4,117 2,813
Shareholders' Equity 45,749 43,643 41,809
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $555,875 $403,276 $321,455
========= ========= =========
---- ---- ----
INTEREST SPREAD (2) 3.51 % 3.97 % 4.25 %
==== ==== ====
------ ------ ------
NET INTEREST INCOME $20,788 $17,325 $14,706
====== ====== ======
NET INTEREST MARGIN (3) 4.09 % 4.75 % 5.00 %
====== ====== ======
- -------------------------------------------------
(1) Interest income on average loans includes loan fee recognition of $979,000,
$969,000 and $697,000 in 2001, 2000 and 1999 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,
2000-2001 ATTRIBUTABLE TO: 1999-2000 ATTRIBUTABLE TO:
---------------------------- --------------------------
Net Net
Volume(1) Rate(2) Change Volume(1) Rate(2) Change
--------- ------- ------- --------- ------- ------
(thousands)
INTEREST INCOME:
Federal Funds Sold $ (40) $ (66) $ (106) $ (477) $ 42 $ (435)
Investment Securities Available for Sale (9) (237) (246) (697) 136 (561)
Investment Securities Held to Maturity (208) 20 (188) 40 28 68
Loans 13,577 (4,634) 8,943 9,140 560 9,700
Interest Bearing Deposits (33) (14) (47) (483) 14 (469)
--------- ------- ------- --------- ------- ------
Total 13,287 (4,931) 8,356 7,523 780 8,303
INTEREST EXPENSE:
NOW & Money Markets 1,272 (1,104) 168 661 1,321 1,982
Savings 23 (65) (42) (5) (2) (7)
Time Deposits 4,956 (319) 4,637 1,030 1,258 2,288
Federal Funds Purchased and Repurchase Agreements 302 (322) (20) 124 121 245
Short Term Borrowings 241 (356) (115) 1,176 - 1,176
Other Borrowings 265 - 265 - - -
--------- ------- ------- --------- ------- ------
Total 7,059 (2,166) 4,893 2,986 2,698 5,684
--------- ------- ------- --------- ------- ------
Net Interest Income $ 6,228 $(2,765) $3,463 $ 4,537 $(1,918) $2,619
========= ======= ======= ========= ======= ======
- ---------------------------------
(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 totaled $5.6 million in 2001, an increase of 69% from
the $3.3 million in 2000, and a 13% increase from 1999. Service charges on
deposit account increased $358,000 or 16% in 2001, compared with $119,000 or 6%
in 2000. Other non-interest income, which includes credit card fees, credit life
insurance income, safe deposit box fees, fees from secondary market mortgage
loan sales, net gains and losses from sale of securities and other miscellaneous
fees, increased $1.9 million in 2001 compared to $267,000 in 2000. The increase
in other fee income in 2001 was primarily attributed to growth in secondary
market mortgage loan sales, which is reflective of a ramping up of the Company's
mortgage loan origination operations. Mortgage loan originations also benefited
from the declining rate environment during 2001.
Non-interest income as a percentage of average assets was 1.01% in 2001
compared to 0.83% and 0.92% in 2000 and 1999, respectively.
Non-Interest Expense
Non-interest expense increased by $4.4 million, or 28%, for 2001, compared
to an increase of $3.5 million, or 29%, for 2000. During 2001, non-interest
expenses as a percentage of average assets decreased to 3.57%, compared to 3.84%
and 3.73% in 2000 and 1999, respectively.
Salaries and employee benefits for 2001 increased $1.7 million from 2000
compared to $2.1 million from 1999. The increase from 2000 to 2001 reflects the
opening of two new branches in the First Coast market, the purchase of the Lake
City and Live Oak branches of Republic Bank and increases in operational
headcount to support the Company's expansion strategy. As a percentage of
average total assets, salaries and employee benefits have decreased to 1.84% in
2001 compared to 2.12% and 2.01% in 2000 and 1999, respectively.
18
Occupancy expenses (including furniture, fixtures & equipment) increased to
$3.1 million in 2001 compared to $2.2 million in 2000 and $1.8 million in 1999.
The major factors affecting the increase in occupancy expenses relate to lease
expense, higher real estate taxes, utilities and depreciation on furniture and
equipment for the new branches opened in Jacksonville and St. Augustine, the two
branches purchased from Republic Bank, the relocation during 2000 into new
facilities in Jacksonville and Gainesville and the expansion of the Lake City
Operations Center. CNB continues to monitor and assess its facility and
equipment needs as it positions itself for future growth and expansion.
Other operating expenses at CNB increased 37% in 2001 compared to 2000 and
27% in 2000 compared to 1999. The increase in 2001 was attributable to: (1) an
increase in postage and delivery expense of $120,000, primarily due to
additional courier runs resulting from additional branches; (2) an increase of
$174,000 in supplies, with the major contributing factors being start-up cost at
new branches and general growth in business; (3) an increase of $146,000 in
marketing expense due to the Company's advertising and promotion efforts in new
and established markets; (4) an increase of $131,000 in legal and professional
costs; (5) an increase of $454,000 in data processing fees resulting from the
conversion to an improved data processing platform and (6) amortization expense
related to the core deposit intangible from the Republic Bank acquisition. The
main contributing factors to the increase in other operating expenses in 2000
was an increase in postage and delivery due to additional courier runs and an
increase of $161,000 in communication costs due to expansion. Other contributing
reasons were increases in legal and professional fees and marketing expense.
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,
2001 2000 1999
-------- -------- --------
Data processing $ 1,104 $ 650 $ 590
Advertising and promotion 687 541 354
Postage and delivery 671 551 468
Legal and professional 618 487 327
Telephone 595 584 423
Supplies 578 404 299
Amortization of intangible assets 543 179 179
Regulatory fees 255 149 143
Loan expenses 248 194 165
Administrative 211 196 182
Insurance and bonding 105 89 72
Education expense 101 62 53
Dues and subscriptions 100 103 78
Director fees 70 72 57
Other general operating 67 174 52
Other 518 287 281
--- --- ---
Total other operating expenses $ 6,471 $ 4,722 $ 3,723
===== ===== =====
Income Taxes
The effective tax rate for the year ended December 31, 2001 was 35.1%,
compared to 34.6% for 2000 and 34.7% for 1999. The consolidated provision for
income taxes increased to $1.6 million in 2001, compared to $1.3 million in 2000
and $1.6 million in 1999.
19
Liquidity and Interest Rate Sensitivity
Liquidity is defined as the ability of the Company to meet anticipated
demands for funds under credit commitments and deposit withdrawals at a
reasonable cost on a timely basis. Management measures the Company's liquidity
position by giving consideration to both on-and off- balance sheet sources of
and demands for funds on a daily and weekly basis. These funds can be obtained
by converting assets to cash or by attracting new deposits. Average liquid
assets (cash and amounts due from banks, interest-bearing deposits in other
banks, federal funds sold and investment securities available for sale) totaled
$55.0 million and represented 11.8% of average total deposits during 2001,
compared to $54.4 million and 16.5% for 2000. The Company's loan to deposit
ratio at December 31, 2001 was 98%, compared to 104% at the end of 2000.
In addition to core deposit growth, sources of funds available to meet
liquidity demands include cash received through ordinary business activities
such as the collection of interest and fees, federal funds sold, loan and
investment maturities and lines for the purchase of federal funds by the Company
from its principal correspondent banks. The Bank is also a member of the Federal
Home Loan Bank and has access to short-term and long-term funds. In addition,
the Company entered into a line of credit with one of its correspondent banks in
April 2001. The agreement was amended in October 2001 to reflect the following
structures: (1) a $3 million revolving line of credit maturing on June 30, 2002
with interest floating quarterly at 3-month Libor plus 145 basis points; and (2)
a $10 million term loan maturing October 3, 2006 with interest floating
quarterly at 3-month Libor plus 170 basis points. Semi-annual principal payments
of approximately $714,000 begin in 2004. The Company also entered into a $10
million pay-fixed interest rate swap with the same bank. The fixed rate under
the interest rate swap is 6.45% and the variable rate is based on 3-month Libor
plus 170 basis points. The swap matures October 3, 2006 and has been designated
as a cash flow hedge of the variable interest payments on the $10 million term
loan noted in (2) above. The fair value of the interest rate swap at December
31, 2001 was approximately $9,000. There are no amounts outstanding on the $3
million line of credit. The term loan, line of credit and interest rate swap are
collateralized by 100% of the common stock of the Bank.
In connection with the term loan and line of credit agreement, the Company
is required to maintain compliance with certain covenants and restrictions. The
following financial covenants are to be maintained on a quarterly basis and are
calculated at the Bank-level:
o Interest coverage ratio of greater than or equal to 2.00x through
September 30, 2003.
o Debt service coverage ratio of greater than or equal to 0.85x through
September 30, 2002; 1.00x from October 1, 2002 through September 30,
2003; 1.25x from October 1, 2003 through September 30, 2004; and 1.50x
from October 1, 2004 through maturity.
o Ratio of non-performing assets to total loans plus other real estate
owned and repossessed assets of less than or equal to 1.25%.
o Maintenance of tier 1 and total risk based capital ratios that meet the
benchmarks for consideration as a "well-capitalized" institution
(currently 8% and 10%, respectively). Also, maintenance of a leverage
capital ratio of greater than 6%.
In addition, the Company is subject to the following restrictions:
o No additional debt is permitted without consent of the lender.
o No increases in dividends paid by the Company to its common
shareholders are permitted without consent of the lender.
Failure to maintain any of these covenants would place the Company in
default of the line of credit agreement. In such a case, absent any waivers
obtained from the lender, all amounts payable could be accelerated and become
due immediately. As of December 31, 2001, the Company was in compliance with all
covenants.
The level of commitments to fund additional borrowings and standby letters
of credit also impacts the Company's liquidity position. These commitments, when
drawn, are generally funded through deposit inflows, loan and investment
maturities, interest receipts and, to the extent necessary, short term purchases
of federal funds. The Company's borrowing capacity under the FHLB is also
20
available to fulfill commitments to lend. Since many commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash 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 and
standby letters of credit amount to approximately $122,000,000 and $7,373,000 at
December 31, 2001 and 2000, respectively, and expire as outlined in the table
below (in thousands):
Unfunded Standby
Commitments Letters of Credit
----------- -----------------
2002 $ 37,413 $ 5,947
2003 21,587 1,366
2004 22,122 60
2005 9,479 -
2006 7,227 -
Thereafter 24,172 -
---------- ----------
$ 122,000 $ 7,373
========== ==========
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities, at a given time interval, including both
floating rate instruments and instruments that are approaching maturity.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize the
overall interest rate risks to the Company.
The Company's gap and liquidity positions are reviewed on a regular basis
by management to determine whether or not changes in policies and procedures are
necessary to achieve financial goals. Included in the review is an internal
analysis of the possible impact on net interest income due to market changes in
interest rates. Based on this internal analysis, at December 31, 2001, a gradual
increase in interest rates of 200 basis points would have increased net interest
income over the ensuing twelve-month period by 1.09%. A gradual decrease in
interest rates of 200 basis points over this same period would have decreased
net interest income by 1.11% as compared to a stable rate environment. A similar
200 basis point increase (decrease) would have decreased (increased) the Bank's
market value of equity by 2.36% and (1.86%), respectively. Market value of
equity is defined as the difference between the estimated fair value of the
Company's assets less the estimated fair value of liabilities.
Table 3, "Rate Sensitivity Analysis" presents rate sensitive assets and
liabilities, separating fixed and variable interest rate categories. The
estimated fair value of each instrument category is also shown in the table.
While these fair values are based on management's judgment of the most
appropriate factors, there is no assurance that, were the Company to have
disposed of such instruments on December 31, 2001, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances.
21
Table 3: Rate Sensitivity Analysis
December 31, 2001
(Dollars in thousands) Fair
1 Year 2 Years 3 Years 4 Years 5 Years Beyond TOTAL Value
------ ------- ------- ------- ------- ------ ----- -----
INTEREST-EARNING ASSETS:
- ------------------------
Gross Loans
Fixed Rate Loans $ 65,019 $ 44,252 $ 38,787 $ 29,833 $ 30,800 $ 78,478 $ 287,169 $ 296,753
Average Interest Rate 8.06% 8.34% 8.27% 8.56% 8.09% 7.60% 8.06%
Variable Rate Loans 78,389 28,740 16,976 17,458 11,432 81,391 234,386 241,228
Average Interest Rate 5.50% 5.40% 5.90% 5.78% 6.17% 7.67% 6.32%
Investment Securities(1)
Fixed Rate Investments 3,060 - 18,136 - 4,060 6,630 31,886 32,380
Average Interest Rate 2.56% 5.63% 6.15% 4.80% 5.23%
Variable Rate Investments - - - - - 820 820 833
Average Interest Rate 6.20% 6.20%
Federal Funds Sold 2,100 - - - - - 2,100 2,100
Average Interest Rate 1.97% 1.97%
Other Earning Assets(2) 4,431 - - - - - 4,431 4,431
Average Interest Rate 5.88% 5.88%
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total Interest-Earning Assets $ 152,999 $ 72,992 $ 73,899 $ 47,291 $ 46,292 $ 167,319 $ 560,792 $ 577,725
Average Interest Rate 6.49% 7.18% 7.08% 7.53% 7.45% 7.52% 7.13%
========== ========== ========== ========== ========== ========== ========== ===========
INTEREST-BEARING LIABILITIES:
- -----------------------------
NOW $ 43,313 $ - $ - $ - $ - $ 61,844 $ 105,157 $ 105,157
Average Interest Rate 2.33% 0.50% 2.39%
Money Market 62,198 - - - - 3,890 66,088 66,088
Average Interest Rate 3.25% 1.46% 3.14%
Savings - - - - - 20,250 20,250 20,250
Average Interest Rate 0.75% 0.75%
CD's Under $100,000 131,974 9,929 8,760 2,078 245 - 152,986 154,191
Average Interest Rate 4.53% 4.84% 4.34% 4.62% 4.52% 4.54%
CD's $100,000 and Over 105,089 4,829 5,009 624 - - 115,551 116,726
Average Interest Rate 4.83% 5.21% 4.63% 6.54% 4.85%
Securities Sold Under
Repurchase Agreements and
Federal Funds Purchased 18,148 - - - - - 18,148 18,148
Average Interest Rate 1.62% 1.62%
Other Borrowings(3) - - - - 10,000 - 10,000 10,000
Average Interest Rate 4.30% 4.30%
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total Interest-Bearing Liabilities$ 360,722 $ 14,758 $ 13,769 $ 2,702 $ 10,245 $ 85,984 $ 488,180 $ 490,560
Average Interest Rate 3.99% 4.96% 4.45% 5.06% 4.31% 0.60% 3.45%
========== ========== ========== ========== ========== ========== ========== ===========
- -----------------------------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net un realized gains of $510,000.
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank Stock,
Federal Home Loan Bank Stock and other marketab le equity securities.
(3) Other borrowings consists of a term loan maturing June 30, 2006 that bears
interest at 3-month Libor plus 170 basis points. The variable rate is reset
quarterly. The variable interest payments on the term loan are being hedged
through an interest rate swap. Under the interest rate swap, the Company
pays a fixed rate of interest of 6.45% and receives a floating rate of
interest of 3-month Libor plus 170 basis points. Other terms of the swap
mirror those of the term debt.
22
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, averaged 80% of total average deposits in 2001 and 83% in
2000. 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, 2001
Amount
-----------
(thousands)
Three Months or Less $ 35,394
Three Through Six Months 29,755
Six Through Twelve Months 39,940
Over Twelve Months 10,462
-----------
Total $ 115,551
===========
Earning Assets
Loans
Lending activities are CNB's single largest source of revenue. Although
management is continually evaluating alternative sources of revenue, lending is
the major segment of the Company's business and is key to profitability. Average
loans for the year ended December 31, 2001 were $465.6 million, or 92% of
average earning assets as compared to $317.5 million, or 87% of average earning
assets for 2000.
The commercial loan portfolio includes commercial, financial and
agricultural loans as well as commercial real estate loans. As of December 31,
2001, the commercial loan portfolio comprised 54% of total loans compared to 51%
in 2000. During 2001, commercial loans experienced their strongest growth in the
Company's history. This growth was primarily centered in our expansion markets.
During 2001, real estate mortgages experienced significant growth of $37.2
million, or 31%. As of December 31, 2001, the real estate mortgage loan
portfolio (including loans held for sale) was 30% of total loans compared to 32%
in 2000.
As of December 31, 2001 the Company had total gross loans of $521.6
million, compared to $380.8 million at December 31, 2000, an increase of $140.7
million or 37%. The composition of the Company's loan portfolio for the past
five years is presented in Table 5.
Table 5: Loan Portfolio Composition
As of December 31,
Types of Loans 2001 2000 1999 1998 1997
- -------------- ------- ------- ------- ------- -------
(thousands)
Commercial, Financial and Agricultural $ 280,453 $ 192,540 $ 136,937 $ 85,208 $ 69,238
Real Estate - Construction 41,064 33,648 18,926 8,527 3,336
Real Estate - Mortgages Held for Sale 9,908 962 - - -
Real Estate - Mortgage 147,973 119,701 86,275 72,357 68,561
Installment and Consumer 42,157 33,970 23,946 20,923 18,514
------ ------ ------ ------ ------
Total Loans, Net of Unearned Discount 521,555 380,821 266,084 187,015 159,649
Less: Allowance for Loan Losses (5,205) (3,670) (2,671) (1,875) (1,495)
--------- --------- -------- -------- --------
Net Loans $ 516,350 $ 377,151 $ 263,413 $ 185,140 $ 158,154
========= ========= ======== ======== ========
23
Table 6 sets forth the maturity distribution for selected components of the
Company's loan portfolio as of December 31, 2001. 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, 2001
0-12 1-5 Over 5
Months Years Years Total
-------- --------- ---------- -------------
(thousands)
Commercial, Financial & Agricultural $ 58,813 $ 117,307 $ 104,333 $ 280,453
Real Estate - Construction 18,895 22,169 - 41,064
All Other Loans 65,700 78,802 55,536 200,038
--------- ---------- ---------- ----------
Total $143,408 $ 218,278 $ 159,869 $ 521,555
========= ========== ========== ==========
Fixed Interest Rate $ 65,019 $ 143,672 $ 78,478 $ 287,169
Variable Interest Rate $ 78,389 $ 74,606 $ 81,391 $ 234,386
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. The Bank's four largest
concentration categories are: Land Development, Commercial Real Estate,
Professional and Residential Real Estate.
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 increased from $1.5 million at December 31, 2000 to $2.9
million at December 31, 2001. Non-performing assets as a percentage of total
assets increased to 0.47% in 2001 from 0.32% in 2000. The increase in
non-performing assets is attributed to continued seasoning of the Company's loan
portfolio, particularly in the newer markets, and the general decline in
economic activity during 2001.
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.
Table 7: Non-Performing Assets
December 31,
2001 2000 1999 1998 1997
----------- ----------- ------------ ------------ -----------
(dollars in thousands)
Non-Accrual Loans $ 1,377 $ 579 $ 549 $ 1,393 $ 1,045
Past Due Loans 90 Days or
More and Still Accruing 1,271 840 180 22 158
Other Real Estate Owned &
Repossessions 229 56 102 613 320
-------- -------- -------- -------- -------
Total Non-Performing Assets $ 2,877 $ 1,475 $ 831 $ 2,028 $ 1,523
======== ======== ======== ======== =======
Percent of Total Assets 0.47% 0.32% 0.24% 0.65% 0.56%
======== ======== ======== ======== =======
24
The allowance for loan loss 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
allowance for loan loss is established through a provision for loan loss charged
to expense. Loans are charged against the allowance for loan loss when
management believes that the collectibility of the principal is unlikely. The
evaluation of collectibility takes into consideration such objective factors as
changes in the nature and volume of the loan portfolio, levels maintained by
other peer banks and historical loss experience. The evaluation also considers
certain subjective factors such as overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrowers'
ability to pay. The determination of the allowance for loan losses considers
both specifically identified impaired loans, as well as expected losses on large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment. The level of the allowance for loan loss is also impacted by
increases and decreases in loans outstanding, since either more or less
allowance is required as the amount of the Company's credit exposure changes. To
the extent actual loan losses differ materially from management's estimate of
these subjective factors, loan growth/run-off accelerates or the mix of loan
types changes, the level of the provision for loan loss, and related allowance,
can and will fluctuate.
The allowance for loan losses on December 31, 2001, was $5.2 million, or
1.00% of total loans outstanding, net of unearned income compared to $3.7
million, or 0.96% on December 31, 2000. Table 8: "Allocation of Allowance for
Loan Losses," set forth below, indicates the specific reserves allocated by loan
type.
Table 8: Allocation of Allowance for Loan Losses
December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(dollars in thousands)
Commercial, Financial
and Agricultural $3,669 53.8% $2,607 50.5% $1,670 51.5% $1,061 45.6% $ 932 43.4%
Real Estate-Construction 25 7.9% 15 8.8% 12 7.1% 6 4.5% 9 2.1%
Real Estate-Mortgage 484 30.3% 293 31.7% 220 32.4% 127 38.7% 163 42.9%
Consumer 932 8.0% 734 9.0% 769 9.0% 621 11.2% 391 11.6%
Unallocated 95 - 21 - - - 60 - - -
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Total $5,205 100% $ 3,670 100% $2,671 100% $1,875 100% $1,495 100%
======= ======= ======== ======= ======= ======= ======= ======= ======= =======
25
Table 9: "Activity in Allowance for Loan Losses" indicates activity in the
allowance for loan losses for the last five years.
Table 9: Activity in Allowance for Loan Losses
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(dollars in thousands)
Balance at Beginning of Year $ 3,670 $ 2,671 $ 1,875 $ 1,495 $ 1,396
Allowance Acquired by Acquisition 110 - - - -
Loans Charged-Off:
Commercial, Financial and Agricultural 410 75 312 123 160
Real Estate - Mortgage 59 40 13 3 -
Consumer 406 409 309 296 248
-------- -------- -------- -------- --------
Total Loans Charged-Off (875) (524) (634) (422) (408)
Recoveries on Loans Previously Charged-Off:
Commercial, Financial and Agricultural 116 32 188 41 24
Real Estate - Mortgage 17 - - 7 -
Consumer 117 141 82 44 43
-------- -------- -------- -------- --------
Total Loan Recoveries 250 173 270 92 67
-------- -------- -------- -------- --------
Net Loans Charged-Off (625) (351) (364) (330) (341)
-------- -------- -------- -------- --------
Provision for Loan Losses
Charged to Expense 2,050 1,350 1,160 710 440
-------- -------- -------- -------- --------
Ending Balance $ 5,205 $ 3,670 $ 2,671 $ 1,875 $ 1,495
======== ======== ======== ======== ========
Total Loans Outstanding $521,555 $ 380,821 $266,084 $187,015 $159,649
Average Loans Outstanding $465,551 $ 317,491 $215,861 $171,048 $155,168
Allowance for Loan Losses
to Loans Outstanding 1.00% 0.96% 1.00% 1.00% 0.94%
Net Charge-Offs to
Average Loans Outstanding 0.13% 0.11% 0.17% 0.19% 0.22%
Investment Portfolio
The Company uses its securities portfolio to assist in maintaining proper
interest rate sensitivity in the balance sheet, to provide securities to pledge
as collateral for public funds and repurchase agreements, and to provide an
alternative investment for available funds. The total recorded value of
securities was $37.1 million at December 31, 2001, a decrease of 9% from $40.7
million at December 31, 2000.
Securities are classified as either held-to-maturity or available-for-sale
and are recorded at amortized cost and fair market value, respectively.
Securities available-for-sale, which made up 89% of the total investment
portfolio at December 31, 2001, had a value of $33.0 million. Securities in the
available-for-sale portfolio are recorded at fair value on the balance sheet and
unrealized gains and losses associated with these securities are recorded, net
of tax, as accumulated other comprehensive income (loss). At December 31, 2001,
accumulated other comprehensive income included a net unrealized gain of
$326,000, compared to a $33,000 net unrealized loss at December 31, 2000.
As a percent of total earning assets, the investment portfolio has
decreased to a level of 7% at December 31, 2001 compared to 10% at the end of
2000. The decrease in the size of the portfolio relative to total earning
assets is directly related to the increase in loan growth.
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
26
into federal funds transactions with its principal correspondent banks. The
Federal Reserve Bank and Federal Home Loan Bank also require equity investments
to be maintained by the Company.
The following tables sets forth the maturity distribution and the weighted
average yields of the Company's investment portfolio.
Table 10: Maturity Distribution of Investment Securities (1)
December 31, 2001
Dollars in Thousands Held to Maturity Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
---- ------------ ---- ------------
U.S. Government Agencies
and Corporations:
One Year or Less $ - $ - $ 2,970 $ 2,976
Over One Through Five Years 4,060 4,057 17,900 18,474
----------- ------------ ----------- ------------
Total U.S. Government Agencies
and Corporations 4,060 4,057 20,870 21,450
Obligations of State and Political
Subdivisions:
One Year or Less - - 90 91
Over One Through Five Years - - 236 241
Over Ten Years - - 609 640
----------- ------------ ----------- ------------
Total Obligations of State and
Political Subdivisions - - 935 972
Mortgage-Backed Securities (2):
Over Five Through Ten Years - - 4,777 4,671
Over Ten Years - - 2,064 2,063
----------- ------------ ----------- ------------
Total Mortgage-Backed Securities - - 6,841 6,734
Other Securities:
Over Ten Years (3) - - 3,847 3,847
----------- ------------ ----------- ------------
Total Other Securities - - 3,847 3,847
----------- ------------ ----------- ------------
Total Securities $ 4,060 $ 4,057 $ 32,493 $ 33,003
=========== ============ =========== ============
- -----------------------------
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Represents investments in mortgage-backed securities which are subject to
early repayment.
(3) Represents investment in Federal Reserve Bank and Federal Home Loan Bank
stock and other marketable equity securities.
Table 10a: Weighted Average Yield by Range of Maturities
December 31,
2001 2000
---- ----
One Year or Less 2.56% 6.49%
Over One through Five Years 5.72 6.00
Over Five through Ten Years 4.95 6.18
Over Ten Years (1) 4.96 6.45
(1) Represents adjustable rate, mortgage-backed securities which are repriceable
within one year.
27
Capital Resources
Shareholders' equity at December 31, 2001 was $46.7 million, as compared to
$44.6 million at December 31, 2000. In 2001, the Board of Directors declared
dividends totaling $0.20 per share, consistent with 2000. At December 31, 2001,
the Company's common stock had a book value of $7.64 per share compared to $7.32
per share at the end of 2000.
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 were used
to support expansion plans and for general corporate purposes.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy guidelines
the Company must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures as defined by regulation and established to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios of
Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets. If such minimum amounts and ratios are met, the Bank is
considered "adequately capitalized." If a bank exceeds the requirements of
"adequately capitalized" and meets even more stringent minimum standards, it is
considered to be "well capitalized." As of December 31, 2001, the Bank meets all
capital adequacy requirements to which it is subject.
At December 31, 2001, the Company's Tier 1 capital, total risk-based
capital and Tier 1 leverage ratios were 8.0%, 9.0% and 6.5%, respectively.
Selected capital ratios at year end 2001 as compared to 2000 are shown in Table
11.
Table 11: Capital Ratios
December 31, Well Capitalized Regulatory
2001 2000 Requirements Minimums
-------- -------- ------------ --------
Risk Based Capital Ratios:
Tier 1 Capital Ratio 8.0% 11.1% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 9.0% 12.0% 10.0% 8.0%
Tier 1 Leverage Ratio 6.5% 9.8% 5.0% 4.0%
28
Quarterly Financial Information
Table 12 sets forth, for the periods indicated, certain consolidated 2001
and 2000 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
2001 2000
----------------------------------- -----------------------------------
(dollars in thousands, except per share data)
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
- ----------------------------------- ---- ---- ---- ---- ---- ---- ---- ----
Summary of Operations:
Net interest income $ 5,653 $ 5,332 $ 5,101 $ 4,702 $ 4,562 $ 4,358 $ 4,311 $ 4,094
Provision for loan losses (600) (550) (500) (400) (400) (350) (300) (300)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan loss 5,053 4,782 4,601 4,302 4,162 4,008 4,011 3,794
Other income (excluding securities
transactions) 1,676 1,372 1,437 1,019 939 848 780 771
Securities gains, net 129 - - - - - - -
Other expenses (5,518) (5,197) (4,733) (4,388) (4,135) (3,891) (3,758) (3,697)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax expense 1,340 957 1,305 933 966 965 1,033 868
Income tax expense (476) (333) (462) (323) (335) (333) (359) (298)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $ 864 $ 624 $ 843 $ 610 $ 631 $ 632 $ 674 $ 570
========= ========= ========= ========= ========= ========= ========= =========
Per Common Share:
Basic earnings per common share $ 0.14 $ 0.10 $ 0.14 $ 0.10 $ 0.10 $ 0.10 $ 0.11 $ 0.09
Diluted earnings per common share 0.14 0.10 0.14 0.10 0.10 0.10 0.11 0.09
Dividends declared 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Book value 7.64 7.61 7.53 7.43 7.32 7.23 7.13 7.09
Market price
High 10.31 12.61 13.63 15.00 9.25 8.75 8.50 9.38
Low 9.11 9.00 10.35 8.00 7.25 7.13 7.13 7.25
Close 10.00 9.65 12.95 13.94 8.00 8.50 7.75 7.63
Balance Sheet Data (end of quarter):
Assets $612,021 $601,792 $576,959 $502,329 $467,593 $433,540 $398,489 $373,483
Loans, net 516,350 504,036 475,507 410,947 377,151 346,457 313,127 290,077
Deposits 532,891 522,754 489,476 400,028 367,686 339,497 329,304 322,472
Shareholders' Equity 46,669 46,242 45,911 45,308 44,636 44,042 43,566 43,306
29
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
On January 28, 1997, the SEC 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. As noted below,
at December 31, 2001, the Company was a party to a single interest rate
derivative contract. The Company also holds other financial instruments, which
include investments, loans and deposit liabilities. The release requires
quantitative and qualitative disclosures about market risk. See the section
titled "Liquidity and Interest Rate Sensitivity" for further discussion on the
Company's management of interest rate risk.
The Company's sole derivative contract is a $10 million notional interest
rate swap that was entered into as a hedge of interest rate risk inherent in the
Company's $10 million term loan. Under the terms of the swap, the Company will
receive a variable rate of interest equal to 90-day Libor plus 170 basis points,
reset quarterly. The Company will pay a fixed rate of interest equal to 6.45%
for the life of the contract. All cash flows are computed based on the $10
million notional amount and are settled quarterly on a net basis. The contract
matures October 3, 2006 and the notional amount will be reduced by $714,286 on a
semi-annual basis beginning April 2004. The fair value of the swap at December
31, 2001 was approximately $9,000. The swap is being accounted for as a cash
flow hedge of the variable interest payments under the $10 million term debt.
For additional information, see Notes 2 and 8 of Notes to Consolidated Financial
Statements.
Non-derivative financial instruments that have market risk are included in
Table 3: "Rate Sensitivity Analysis". These instruments are shown by maturity,
separated by fixed and variable interest rates. The estimated fair value of each
instrument category is also shown in the table. While these estimates of fair
value are based on management's judgment of the most appropriate factors, there
is no assurance that, were the Company to have disposed of such instruments at
December 31, 2001, the estimated fair values would necessarily have been
achieved at that date, since market values may differ depending on various
circumstances. The estimated fair values at December 31, 2001 would not
necessarily be considered to apply at subsequent dates.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the
portrayal of the Company's financial condition and requires management's most
difficult, subjective or complex judgments. The circumstances that make these
judgments difficult, subjective or complex have to do with the need to make
estimates about the effect of matters that are inherently uncertain.
Based on this definition, the Company's primary critical accounting policy
is the establishment and maintenance of an allowance for loan loss. The
allowance for loan loss is established through a provision for loan loss charged
to expense. Loans are charged against the allowance for loan loss when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
inherent losses on existing loans that may become uncollectible based on
evaluations of the collectibility of the loans. The evaluations take into
consideration such objective factors as changes in the nature and volume of the
loan portfolio, levels maintained by other peer banks and historical loss
experience. The evaluation also considers certain subjective factors such as
overall portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay. The level of the
allowance for loan loss is also impacted by increases and decreases in loans
outstanding, since either more or less allowance is required as the amount of
the Company's credit exposure changes. To the extent actual loan losses differ
materially from management's estimate of these subjective factors, loan
growth/run-off accelerates or the mix of loan types changes, the level of the
provision for loan loss, and related allowance, can and will fluctuate.
The accounting for the Company's core deposit intangible asset is also
subject to significant estimates about future results. In connection with the
acquisition of the Lake City and Live Oak branches of Republic Bank, the Company
recorded a core deposit intangible of approximately $6,000,000. This intangible
asset is being amortized on a straight-line basis over its estimated useful life
of 10 years. The life of this asset was based on the estimated future period of
30
benefit to the Company of the depositor relationships acquired. To the extent
that the deposit accounts acquired leave the Company faster than anticipated,
the amount of the core deposit intangible that is amortized each period could
increase significantly, thus shortening its useful life. Through December 31,
2001, the performance of acquired accounts did not differ materially from
expectations.
FINANCIAL STATEMENTS
The consolidated financial statements that 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.
31
CNB Florida Bancshares, Inc.
and Subsidiary
Consolidated Financial Statements
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To CNB Florida Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of CNB FLORIDA BANCSHARES, INC. (a Florida corporation) AND SUBSIDIARY as of
December 31, 2001 and 2000 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
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, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
January 23, 2002
33
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2001 2000
-----------------------
(dollars in thousands)
ASSETS
Cash and due from banks $ 17,993 $ 20,769
Federal funds sold 2,100 -
Interest-bearing deposits in other banks 584 129
--------- ---------
Total cash and cash equivalents 20,677 20,898
Investment securities available for sale 33,003 33,236
Investment securities held to maturity 4,060 7,460
Loans, net 516,350 377,151
Premises and equipment, net 26,167 22,433
Intangible assets, net 6,802 1,033
Other assets 4,962 5,382
--------- ---------
Total assets $612,021 $467,593
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 72,859 $ 52,082
Savings, NOW and money market 191,495 129,865
Time under $100,000 152,986 115,406
Time $100,000 and over 115,551 70,333
--------- ---------
Total deposits 532,891 367,686
Securities sold under repurchase agreements and federal funds purchased 18,148 21,142
Other borrowings 10,000 30,000
Other liabilities 4,313 4,129
--------- ---------
Total liabilities 565,352 422,957
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 19)
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,
6,106,453 shares issued and outstanding for 2001 and
6,099,376 shares issued and outstanding for 2000 61 61
Additional paid-in capital 30,533 30,581
Retained earnings 15,749 14,027
Accumulated other comprehensive income (loss), net of taxes 326 (33)
--------- ---------
Total shareholders' equity 46,669 44,636
--------- ---------
Total liabilities and shareholders' equity $612,021 $467,593
========= =========
The accompanying notes are an integral part of these financial statements.
34
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2001 2000 1999
-------- -------- --------
(dollars and shares in thousands)
INTEREST INCOME
Interest and fees on loans $ 38,055 $ 29,112 $ 19,412
Interest on investment securities available for sale 1,864 2,110 2,671
Interest on investment securities held to maturity 384 572 504
Interest on federal funds sold 102 208 643
Interest on interest-bearing deposits 12 59 528
-------- -------- --------
Total interest income 40,417 32,061 23,758
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 17,751 12,988 8,725
Interest on repurchase agreements and federal funds purchased 552 572 327
Interest on other borrowings 1,326 1,176 -
-------- -------- --------
Total interest expense 19,629 14,736 9,052
-------- -------- --------
NET INTEREST INCOME 20,788 17,325 14,706
PROVISION FOR LOAN LOSS 2,050 1,350 1,160
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 18,738 15,975 13,546
-------- -------- --------
NON-INTEREST INCOME
Service charges 2,599 2,241 2,122
Secondary market mortgage sales 1,917 345 106
Other fees and charges 988 752 724
Gain on sale of securities 129 - -
-------- -------- --------
Total non-interest income 5,633 3,338 2,952
-------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 10,252 8,539 6,461
Occupancy and equipment expenses 3,113 2,220 1,810
Other operating expenses 6,471 4,722 3,723
-------- -------- --------
Total non-interest expense 19,836 15,481 11,994
-------- -------- --------
INCOME BEFORE INCOME TAXES 4,535 3,832 4,504
INCOME TAXES 1,594 1,325 1,563
-------- -------- --------
NET INCOME $ 2,941 $ 2,507 $ 2,941
======== ======== ========
EARNINGS PER SHARE
Basic earnings per share $ 0.48 $ 0.41 $ 0.49
======== ======== ========
Basic weighted average shares outstanding 6,095 6,095 5,995
======== ======== ========
Diluted earnings per share $ 0.48 $ 0.41 $ 0.48
======== ======== ========
Diluted weighted average shares outstanding 6,188 6,134 6,070
======== ======== ========
The accompanying notes are an integral part of these financial statements.
35
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumulated
Other
(dollars and shares in thousands) Common Stock Additional Comprehensive Total
--------------- Paid-In Retained Income (Loss), Shareholders'
Shares Value Capital Earnings Net of Taxes Equity
------ ----- ------- -------- ------------ ------
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 $(568) taxes (955)
Total comprehensive income 1,986
Cash dividends ($0.20 per share) (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
Comprehensive income:
Net income 2,507
Change in unrealized gain on investment
securities available for sale, net of $300 taxes 504
Total comprehensive income 3,011
Cash dividends ($0.20 per share) (1,226) (1,226)
Exercise of stock options 33 113 113
Repurchase of common stock (50) (395) (395)
Issuance of restricted stock 58 58
----- ---- -------- -------- ------ --------
BALANCE, December 31, 2000 6,099 61 30,581 14,027 (33) 44,636
Comprehensive income:
Net income 2,941
Change in unrealized gain on investment
securities available for sale, net of $210 taxes 353
Change in fair value of cash flow hedges, net
of $3 taxes 6
Total comprehensive income 3,300
Cash dividends ($0.20 per share) (1,219) (1,219)
Exercise of stock options 31 166 166
Repurchase of common stock (24) (234) (234)
Issuance of restricted stock 20 20
----- ---- -------- -------- ------ --------
BALANCE, December 31, 2001 6,106 $ 61 $ 30,533 $ 15,749 $ 326 $ 46,669
===== ==== ======== ======== ====== ========
The accompanying notes are an integral part of these financial statements.
36
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,941 $ 2,507 $ 2,941
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sale of securities available for sale (129) - -
Depreciation and amortization 2,046 1,176 971
Provision for loan loss 2,050 1,350 1,160
Investment securities (accretion) amortization, net (6) 13 (278)
Non-cash compensation 20 58 71
Deferred income tax benefit (715) (370) (242)
Changes in assets and liabilities:
Other assets 928 (1,469) 82
Other liabilities 194 1,394 (255)
--------- --------- ---------
Net cash provided by operating activities 7,329 4,659 4,450
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (129,012) (115,088) (79,433)
Purchases of investment securities available for sale (42,840) (1,068) (20,413)
Purchases of investment securities held to maturity - - (8,754)
Proceeds from sales of investment securities available for sale 1,726 - -
Proceeds from called investment securities available for sale 14,100 472 3,000
Proceeds from called investment securities held to maturity 3,395 1,245 -
Proceeds from maturities of investment securities available for sale 27,946 3,287 40,442
Proceeds from maturities of investment securities held to maturity 3 1,852 1,064
Purchases of premises and equipment (3,356) (9,035) (4,432)
Branches acquired from Republic Bank 41,921 - -
--------- --------- ---------
Net cash used in investing activities (86,117) (118,335) (68,526)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 102,848 79,483 23,094
Net (decrease) increase in securities sold under repurchase agreements
and federal funds purchased (2,994) 9,079 (507)
Net (decrease) increase in FHLB advances (30,000) 30,000 -
Proceeds from other borrowings 10,000 - -
Cash dividends (1,219) (1,226) (1,159)
Issuance of common stock - - 11,368
Repurchase of common stock (234) (395) (96)
Proceeds from exercise of stock options 166 113 9
--------- --------- ---------
Net cash provided by financing activities 78,567 117,054 32,709
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (221) 3,378 (31,367)
CASH AND CASH EQUIVALENTS, beginning of year 20,898 17,520 48,887
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 20,677 $ 20,898 $ 17,520
========= ========= =========
The accompanying notes are an integral part of these financial statements.
37
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 fifteen (15) banking offices in north Florida.
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. Certain amounts relating to 2000 and 1999
have been reclassified to conform with current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 that
are used for asset/liability management, liquidity and other funds
management purposes. These securities may be sold in response to
changes in interest rate risk, prepayment risk or other similar
economic factors. These securities are recorded at fair value, with
unrealized gains and losses, net of deferred income taxes, recorded
in the accumulated other comprehensive income (loss) component of
shareholders' equity. Fair value is estimated based on dealer
quotes.
Held to Maturity
Securities held to maturity represent investment securities where
the Company has both the intent and ability 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. Investment securities are
periodically reviewed for other than temporary declines in value. If such a
decline is determined to have occurred, the amount of the decline is
transferred from other comprehensive income and immediately recorded in
current period earnings. There have been no other than temporary impairment
losses recorded during the years ended December 31, 2001, 2000 and 1999.
38
Loans, Loan Fees and Interest Income
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan loss. Interest on substantially all loans other than certain
installment loans is calculated by using the simple interest method on daily
balances of the principal amounts outstanding.
Loan fees, net of loan origination costs, are deferred and amortized as
yield adjustments over the respective loan terms using a method that does
not differ significantly from the interest method. For 2001, 2000 and 1999,
net loan fees included in interest income amounted to approximately
$979,000, $969,000 and $697,000, respectively.
Allowance for Loan Loss
The allowance for loan loss 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
allowance for loan loss is established through a provision for loan loss
charged to expense. Loans are charged against the allowance for loan loss
when management believes that the collectibility of the principal is
unlikely. The evaluation of collectibility takes into consideration such
objective factors as changes in the nature and volume of the loan portfolio,
levels maintained by other peer banks and historical loss experience. The
evaluation also considers certain subjective factors such as overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay. The determination
of the allowance for loan loss considers both specifically identified
impaired loans, as well as expected losses on large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. The level of the allowance for loan loss is also impacted by
increases and decreases in loans outstanding, since either more or less
allowance is required as the amount of the Company's credit exposure
changes. To the extent actual loan losses differ materially from
management's estimate of these subjective factors, loan growth/run-off
accelerates or the mix of loan types changes, the level of the provision for
loan loss, and related allowance, can and will fluctuate.
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.
Loans Held for Sale
Loans held for sale include residential mortgage loans originated with the
intent to sell in the secondary market. Loans held for sale are carried at
the lower of cost or market value. Any amount by which cost exceeds market
value is accounted for as a valuation allowance, with changes in the
valuation allowance reflected in earnings. There were no valuation
allowances at December 31, 2001 and 2000.
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, which ranged from five to forty years at
December 31, 2001. Maintenance and repairs are charged to expense 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 carrying value may not be
recoverable, an impairment test is performed comparing the carrying value of
39
the asset to estimated undiscounted cash flows. If assets are considered to
be impaired, a charge is recorded to the extent that fair value is less than
carrying value.
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, management periodically performs
valuations 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
$6,802,000 and $1,033,000 at December 31, 2001 and 2000, respectively.
Intangible assets consist of core deposits and goodwill of $6,156,000 and
$646,000, respectively. Core deposit intangibles are being amortized over a
10-year period using the straight-line method. Goodwill is being amortized
over a 15-year period on a straight-line method. Amortization of goodwill
was approximately $70,000 for 2001, 2000 and 1999. Amortization expense
related to core deposit intangibles was $473,000, $109,000 and $109,000 for
2001, 2000 and 1999 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.
As noted in Recently Issued Accounting Pronouncements, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangibles ("SFAS 142") on January 1, 2002. As a result,
goodwill will no longer be amortized, but instead will be periodically
evaluated for impairment.
Interest Rate Contract
As more fully described in Note 8, "Other Borrowings," during 2001 the
Company entered into a pay-fixed interest rate contract as a hedge of
interest rate risk related to a term loan entered into with a bank. The
interest rate contract is accounted for under the provision of SFAS No. 133,
Accounting for Derivatives and Hedging Activities, which requires all
derivatives to be stated at fair value and was adopted by the Company on
January 1, 2001. Because the Company was not a party to derivative contracts
at adoption of this standard, the adoption did not have a material impact of
the financial position or results of operations of the Company. Upon
entering into the interest rate swap, the contract was designated as a cash
flow hedge of the forecasted variable interest payments to be made under the
term loan. The interest rate swap is recorded in the financial statements at
fair value, with changes in value reflected in other comprehensive income.
Unrealized gains and losses on the interest rate contract are reclassified
from other comprehensive income to interest expense when the hedged
transaction impacts earnings. The effectiveness of the hedging relationship
is evaluated at least every three months. There was no hedge ineffectiveness
for the year ended December 31, 2001. The interest rate contract had an
unrealized gain, net of taxes, at December 31, 2001 of $6,000. Of this
amount, approximately $147,000 of pre-tax expense is expected to be
reclassified from other comprehensive income to interest expense over the
next twelve months. This estimate is based on market interest rates on
December 31, 2001 and is subject to variability to the extent interest rates
fluctuate over this time period.
40
Income Taxes
The Company uses the asset and 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 the 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 during the
years ended December 31, 2001, 2000 and 1999.
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 $19,029,000, $13,330,000 and
$9,206,000 during 2001, 2000 and 1999, respectively, and cash paid for
income taxes was approximately $2,025,000, $1,759,000 and $1,720,000 during
2001, 2000 and 1999, respectively.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"). SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company will apply the provisions of SFAS
141 to any future acquisitions.
In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangibles ("SFAS 142"). SFAS 142 requires, among other things, the
discontinuance of goodwill amortization and includes provisions for
reassessment of the useful lives of existing intangibles and the
identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
two-step transitional goodwill impairment test. The first step of the
impairment test must be completed six months from the date of adoption and
the second step must be completed as soon as possible, but no later than the
end of the year of initial application. The Company adopted the provisions
of SFAS 142 on January 1, 2002. The adoption of this standard did not have a
material impact on the financial position or results of operations of the
Company. In addition, the Company completed the transitional goodwill
impairment test during the first quarter of 2002 and determined that
goodwill at transition was not impaired. For the year ended December 31,
2001, the Company recorded goodwill amortization expense of $70,000.
41
In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No.
102 expresses the SEC staff's views on the development, documentation and
application of a systematic methodology in determining an allowance for loan
loss in accordance with generally accepted accounting principles. The SAB
stresses that the methodology for computing the allowance be both
disciplined and consistent, and emphasizes that the documentation supporting
the allowance and provision must be sufficient. SAB No. 102 provides
guidance that is consistent with the Federal Financial Institutions
Examination Council's ("FFIEC"), Policy Statement on Allowance for Loan and
Lease Losses Methodologies and Documentation for Banks and Savings
Institutions, which was also issued in July 2001. SAB No. 102 is applicable
only to banks and savings institutions. The adoption of this bulletin did
not have a material impact on reported results of operations of the Company.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended. The statement establishes
accounting and reporting standards for derivative instruments (including
certain derivative instruments imbedded in other contracts). The Company
adopted the statement on January 1, 2001. Because the Company was not a
party to derivative contracts at adoption of this standard, the adoption did
not have a material impact on the financial position or results of
operations of the Company.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125. The statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. The disclosure requirements of
the statement were effective for fiscal year ending December 31, 2000. The
adoption of the remaining provisions of this standard did not have a
material impact on reported results of operations of the Company. The
remaining provisions were effective April 1, 2001.
42
3. INVESTMENT SECURITIES
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 2001 and 2000 are as follows (in thousands):
2001 U.S. State, Mortgage-
Government County, and Backed
Agencies Municipal Securities Other Total
-------- --------- ---------- ----- -----
Amortized cost ...................... $ 20,870 $ 935 $ 6,841 $ 3,847 $ 32,493
Gross unrealized:
Gains ............................... 580 37 13 - 630
Losses .............................. - - (120) - (120)
-------- ------ ------- ------- --------
Estimated fair value ................ $ 21,450 $ 972 $ 6,734 $ 3,847 $ 33,003
======== ====== ======= ======= ========
2000
U.S. U.S. State, Mortgage-
Treasury Government County, and Backed
Securities Agencies Municipal Securities Other Total
---------- -------- --------- ---------- ----- -----
Amortized cost ...................... $ 7,494 $ 20,000 $ 1,025 $ 1,846 $ 2,924 $ 33,289
Gross unrealized:
Gains ............................... 21 - 22 4 66 113
Losses .............................. - (166) - - - (166)
-------- -------- -------- -------- ------- -----
Estimated fair value ................ $ 7,515 $ 19,834 $ 1,047 $ 1,850 $ 2,990 $ 33,236
======== ======== ======== ======== ======= ========
Amortized cost and estimated fair value of investment securities held to
maturity at December 31, 2001 and 2000 are as follows (in thousands):
2001 U.S.
Government
Agencies Total
-------- -----
Amortized cost .............................................................. $ 4,060 $ 4,060
Gross unrealized:
Gains ....................................................................... - -
Losses ...................................................................... (3) (3)
------- -----
Estimated fair value ........................................................ $ 4,057 $ 4,057
======= =====
2000 U.S. Mortgage-
Government Backed
Agencies Securities Total
-------- ---------- -----
Amortized cost ................................................. $ 7,457 $ 3 $ 7,460
Gross unrealized:
Gains ........................................................... - - -
Losses .......................................................... (2) - (2)
------- ---- -------
Estimated fair value ............................................ $ 7,455 $ 3 $ 7,458
======= ==== =======
Interest income earned on tax-exempt securities in 2001, 2000 and 1999 was
approximately $48,000, $52,000 and $87,000, respectively. Dividends of
approximately $226,000, $146,000 and $113,000 on stock of the Federal
43
Reserve Bank and the Federal Home Loan Bank are included in interest on
investment securities available for sale in 2001, 2000 and 1999,
respectively.
The amortized cost and estimated fair value of securities at December 31,
2001, by contractual maturity, are shown below (in thousands):
Investment Securities Investment Securities
Available for Sale Held to Maturity
------------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Due in:
One year or less ....................................... $ 3,060 $ 3,067 $ - $ -
After one through five years ........................... 18,136 18,715 4,060 4,057
After five through ten ................................. - - - -
Over ten years ......................................... 609 640 - -
Mortgage-backed securities and others .................. 10,688 10,581 - -
------- ------- ------- -------
$32,493 $33,003 $ 4,060 $ 4,057
======= ======= ======= =======
At December 31, 2001, securities with an amortized cost of approximately
$30,416,000 and an estimated fair value of approximately $30,921,000 were
pledged to secure public funds, treasury tax and loan deposits, and repurchase
agreements.
4. LOANS, ALLOWANCE FOR LOAN LOSS AND NONPERFORMING ASSETS
Loans at December 31, 2001 and 2000 were comprised of the following (in
thousands):
2001 2000
--------- ---------
Commercial, financial, and agricultural ............................. $ 280,453 $ 192,540
Real estate--construction ........................................... 41,064 33,648
Real estate--mortgages held for sale ................................ 9,908 962
Real estate--mortgage ............................................... 147,973 119,701
Installment and consumer lines ...................................... 42,157 33,970
--------- ---------
Total loans, net of unearned interest and fees .................. 521,555 380,821
Less allowance for loan loss ........................................ (5,205) (3,670)
--------- ---------
Net loans ...................................................... $ 516,350 $ 377,151
========= =========
44
Activity in the allowance for loan loss account was as follows for the years
ended December 31, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
------- ------- -------
Balance beginning of year .................................. $ 3,670 $ 2,671 $ 1,875
Provision .................................................. 2,050 1,350 1,160
Charge-offs ................................................ (875) (524) (634)
Recoveries ................................................. 250 173 270
Republic acquisition ....................................... 110 - -
------- ------- -------
Balance at end of year ..................................... $ 5,205 $ 3,670 $ 2,671
======= ======= =======
Nonaccrual loans totaled approximately $1,377,000 and $579,000 at December
31, 2001 and 2000, 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 $96,000, $25,000 and $23,000, in 2001, 2000 and 1999,
respectively. In addition to nonaccrual loans, nonperforming assets include
other real estate owned related to property acquired by foreclosure in
settlement of debt and repossessed assets. Other real estate owned and
repossessed assets was approximately $229,000 and $56,000 at December 31,
2001 and 2000, respectively, and is included in other assets in the
accompanying consolidated statements of financial condition.
The Company recognizes income on impaired loans primarily on the cash basis.
Impaired loans are considered to be loans with a probability that the
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Any change in the present value of
expected cash flows is recognized through the allowance for loan loss.
Impaired loan information for the year ended December 31, 2001, 2000 and
1999 is as follows (in thousands):
2001 2000 1999
---- ---- ----
Impaired loans with an allowance ........................................... $1,361 $1,041 $ 686
====== ====== ======
Allowance for impaired loans ............................................... $ 204 $ 213 $ 159
====== ====== ======
Interest income recognized on impaired loans during the year ............... $ 66 $ 40 $ 21
====== ====== ======
The average balance of impaired loans during 2001, 2000 and 1999
approximated $1.0 million.
5. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following components at
December 31 (in thousands):
2001 2000
-------- --------
Buildings and improvements ............................. $ 20,011 $ 15,731
Equipment and furnishings .............................. 8,475 6,974
Land ................................................... 5,224 4,738
Construction in progress ............................... 5 1,421
-------- --------
33,715 28,864
Less accumulated depreciation .......................... (7,548) (6,431)
-------- --------
$ 26,167 $ 22,433
======== ========
45
Depreciation expense was approximately $1,503,000, $997,000 and $792,000 for
2001, 2000 and 1999, respectively.
6. TIME DEPOSITS
At December 31, 2001, the scheduled maturities of certificates of deposit
are as follows (in thousands):
2002 ...................................... $237,063
2003 ...................................... 14,758
2004 ...................................... 13,769
2005 ...................................... 2,702
2006 and thereafter ....................... 245
--------
$268,537
========
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. These transactions do not satisfy
the financial instrument sale criteria outlined under generally accepted
accounting principles. Therefore, the investment securities remain recorded
on the Company's balance sheet, while the related repurchase agreements are
reflected as borrowed funds. The daily average balance of these agreements
during 2001, 2000 and 1999 was approximately $12,284,000, $7,666,000 and
$6,854,000, respectively. Interest expense in 2001, 2000 and 1999 was
approximately $443,000, $447,000 and $322,000, respectively, resulting in an
average rate paid of 3.61% in 2001, 5.83% in 2000 and 4.70% in 1999. The
highest amount outstanding during 2001, 2000 and 1999 was approximately
$19,136,000, $16,542,000 and $10,700,000, respectively.
8. OTHER BORROWINGS
During 2001 and 2000 the Bank received funding from Federal Home Loan Bank
advances. The advances were collateralized by a portion of the Bank's
residential mortgage portfolio and the average rate paid in 2001 and 2000 on
the advances was 5.06% and 6.77%, respectively. Interest expense paid on
Federal Home Loan Bank advances was approximately $1,061,000 in 2001 and
$1,176,000 in 2000. The highest amount outstanding during 2001 and 2000 was
$40,000,000 and $30,000,000, respectively. There were no balances
outstanding at December 31, 2001 and $30,000,000 outstanding at December 31,
2000.
In April 2001, the Company entered into a 364-day, $10 million line of
credit with a bank. The contractual agreement provides for interest at
90-day Libor plus 145 basis points and is collateralized by the Company's
investment in CNB National Bank. During 2001, the Company drew down
$7,000,000 under this line and incurred interest expense of $97,000. This
line of credit was modified in October 2001 as discussed below.
In October 2001, the line of credit agreement was modified into two
facilities as follows:
o Facility A: $3,000,000 line of credit maturing June 30, 2002. Interest
is variable at 90-day Libor plus 145 basis points.
o Facility B: $10,000,000 term loan maturing October 3, 2006. Interest is
variable at 90-day Libor plus 170 basis points and was 4.30% at
December 31, 2001. Semi-annual principal payments of $714,286 begin in
April 2004, with the remainder due at maturity.
46
In connection with the line of credit agreement, the Company is required to
maintain compliance with certain covenants and restrictions. The following
financial covenants are to be maintained on a quarterly basis and are
calculated at the Bank-level:
o Interest coverage ratio of greater than or equal to 2.00x through
September 30, 2003.
o Debt service coverage ratio of greater than or equal to 0.85x through
September 30, 2002; 1.00x from October 1, 2002 through September 30,
2003; 1.25x from October 1, 2003 through September 30, 2004; and 1.50x
from October 1, 2004 through maturity.
o Ratio of non-performing assets to total loans plus other real estate
owned and repossessed assets of less than or equal to 1.25%.
o Maintenance of tier 1 and total risk based capital ratios that meet the
benchmarks for consideration as a "well-capitalized" institution
(currently 8% and 10%, respectively). Also, maintenance of a leverage
capital ratio of greater than 6%.
In addition, the Company is subject to the following restrictions:
o No additional debt is permitted without consent of the lender.
o No increases in dividends paid by the Company to its common
shareholders are permitted without consent of the lender.
Failure to maintain any of these covenants would place the Company in
default of the line of credit agreement. In such a case, absent any waivers
obtained from the lender, all amounts payable could be accelerated and
become due immediately. As of December 31, 2001, the Company was in
compliance with all covenants.
At December 31, 2001, there was $10,000,000 outstanding under Facility B,
consisting of the original $7,000,000 and an additional $3,000,000 received
at the origination date of the term loan. There have been no advances under
Facility A through December 31, 2001. The Company did not have any long-term
debt outstanding during 2000.
In addition to the amended line of credit agreement, the Company entered
into a $10,000,000 notional pay-fixed interest rate swap with the same bank.
The fixed rate under the interest rate swap is 6.45% and the variable rate
is based on 90-day Libor plus 170 basis points. The interest rate swap
matures October 3, 2006 and has been designated as a cash flow hedge of the
variable interest payments on the $10,000,000 term loan noted above
(Facility B). Interest expense on Facility B during 2001, including the
impact of the interest rate swap, was $165,000. The notional amount of the
interest rate swap amortizes in the same manner as Facility B.
47
9. OTHER OPERATING EXPENSES
Components of other operating expenses are as follows for the years ended
December 31, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
------ ------ ------
Data processing ....................... $1,104 $ 650 $ 590
Advertising and promotion ............. 687 541 354
Postage and delivery .................. 671 551 468
Legal and professional ................ 618 487 327
Telephone ............................. 595 584 423
Supplies .............................. 578 404 299
Amortization of intangible assets ..... 543 179 179
Regulatory fees ....................... 255 149 143
Loan expense .......................... 248 194 165
Administrative ........................ 211 196 182
Insurance and bonding ................. 105 89 72
Education expense ..................... 101 62 53
Dues and subscriptions ................ 100 103 78
Directors fees ........................ 70 72 57
Other general operating ............... 67 174 52
Other ................................. 518 287 281
------ ------ ------
$6,471 $4,722 $3,723
====== ====== ======
48
10. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 2001,
2000 and 1999 consisted of the following components (in thousands):
2001 2000 1999
------- ------- -------
Current:
Federal ......................................... $ 1,958 $ 1,432 $ 1,598
State ........................................... 351 263 207
------- ------- -------
Total ....................................... $ 2,309 $ 1,695 $ 1,805
======= ======= =======
Deferred:
Federal ......................................... $ (611) $ (315) $ (244)
State ........................................... (104) (55) 2
------- ------- -------
Total ....................................... $ (715) $ (370) $ (242)
======= ======= =======
Total:
Federal ......................................... $ 1,347 $ 1,117 $ 1,354
State ........................................... 247 208 209
------- ------- -------
Total ....................................... $ 1,594 $ 1,325 $ 1,563
======= ======= =======
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, 2001 and 2000 are as
follows:
2001 2000
------- -------
Deferred tax liabilities:
Property and equipment .............................................................. $ (755) $ (697)
Unrealized gain on investment securities available for sale ........................ (194) -
Unearned loan fees .................................................................. (68) (78)
------- -------
(1,017) (775)
Deferred tax assets:
Loan loss provisions ................................................................ 1,776 1,191
Unrealized loss on investment securities available for sale ......................... - 20
Intangible assets ................................................................... 179 125
Other items ......................................................................... 185 20
------- -------
2,140 1,356
------- -------
Net deferred tax asset ................................................................... $ 1,123 $ 581
======= =======
49
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, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Statutory rates ..................................................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income .................................... (2.1) (2.7) (2.7)
State income taxes, net ........................................ 3.6 2.5 2.5
Nondeductible expenses ......................................... (0.3) 0.8 0.9
---- ---- ----
35.2% 34.6% 34.7%
==== ==== ====
11. COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and changes in
unrealized gains (losses) on securities available for sale and cash flow
hedges, net of income taxes.
Comprehensive income for the years ended December 31, 2001, 2000 and 1999 is
calculated as follows (in thousands):
2001 2000 1999
---- ---- ----
Unrealized gain (loss) recognized in other comprehensive
income (net):
Available for sale securities .............................................. $ 563 $ 804 $(1,523)
Interest rate swap designated as cash flow hedge ........................... 9 - -
------- ------- -------
Total unrealized gains (loss) before income taxes .......................... 572 804 (1,523)
Income taxes ............................................................... 213 300 (568)
------- ------- -------
Net of tax ............................................................... $ 359 $ 504 $ (955)
======= ======= =======
Amounts reported in net income:
Gain on sale of securities ................................................. $ 129 $ - $ -
Interest rate swap designated as cash flow hedge ........................... (54) - -
Net amortization (accretion) ............................................... (6) 13 (278)
------- ------- -------
Reclassification adjustment ................................................ 69 13 (278)
Income taxes ............................................................... (26) (5) 96
------- ------- -------
Reclassification adjustment, net of tax .................................. $ 43 $ 8 $ (182)
======= ======= =======
Amounts reported in other comprehensive income:
Net unrealized gain (loss) arising during period, net of tax ............... $ 402 $ 512 $(1,137)
Reclassification adjustment, net of tax .................................... (43) (8) $ 182
------- ------- -------
Unrealized gain (loss) recognized in other comprehensive
income (net) ............................................................. 359 504 (955)
Net income ................................................................. 2,941 2,507 2,941
------- ------- -------
Total comprehensive income ............................................... $ 3,300 $ 3,011 $ 1,986
======= ======= =======
50
12. 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):
2001 2000
------- -------
Balance, January 1 ............................ $ 7,093 $ 3,690
Participations ............................ (758) -
New loans and advances .................... 2,482 4,936
Repayments (excluding renewals) ........... (594) (1,533)
------- -------
Balance, December 31 .......................... $ 8,223 $ 7,093
======= =======
The loans set forth above were made in the normal course of business at
prevailing interest rates and terms.
13. 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, 2001, the Bank had
approximately $4,014,000 of retained earnings available for dividends to the
Company without being required to seek special regulatory approvals.
14. EQUITY
Dividends Declared
The Company declared cash dividends of $0.20 per share in 2001, 2000 and
1999.
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.
15. 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, allowed for a maximum
grant of 540,000 shares. In May 2001, shareholders approved a proposal to
amend the number of shares that may be granted under the long-term incentive
component of the Plan to 800,000 shares. Prior to the approval of the Plan,
there were issued and outstanding options totaling 166,766 of which 33,306
were exercised in 2000 and 18,626 were exercised in 2001. There are 245,650
shares remaining to be issued under the Plan as of December 31, 2001.
Generally, the options granted under the Plan become exercisable over a
three to four year period 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.
51
Options outstanding and the activity for December 31, 2001, 2000 and 1999
are presented below:
2001 2000 1999
---------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Grant Price Shares Grant Price Shares Grant Price
------ ----------- ------ ----------- ------ -----------
Employee stock option plans:
Outstanding at beginning of year ............ 621,760 $ 7.58 552,566 $ 7.63 359,766 $ 6.26
Options granted ........................... 72,500 9.60 102,500 8.64 214,600 9.92
Options exercised ......................... 30,876 5.39 33,306 3.41 1,800 5.00
Options forfeited ......................... 25,750 8.86 - - 20,000 8.00
------- -------- ------- -------- ------- --------
Outstanding at end of year .................. 637,634 $ 8.34 621,760 $ 7.58 552,566 $ 7.63
======= ======== ======= ======== ======= ========
Options exercisable at year-end ............ 493,087 $ 7.97 391,784 $ 7.40 258,466 $ 5.90
======= ======== ======= ======== ======= ========
Weighted-average fair value of options $ 3.17 $ 2.86 $ 2.59
granted during the year .................. ======== ======== ========
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," in accounting for its
stock option and award plans and has adopted the disclosure-only option
under Statement of Financial Accounting Standards, ("SFAS") No. 123,
Accounting for Stock-Based Compensation. If the Company had adopted the
accounting provisions of SFAS 123 and recognized expense for the fair value
of employee stock options granted in 2001, 2000 and 1999, 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
---------------------------- -----------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Net income ............................. $2,941 $2,507 $2,941 $2,818 $2,407 $ 2,658
Basic earnings per common share ........ $ 0.48 $ 0.41 $ 0.49 $ 0.46 $ 0.39 $ 0.44
Diluted earnings per common share ...... $ 0.48 $ 0.41 $ 0.48 $ 0.46 $ 0.39 $ 0.44
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the grant date using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the
fair value of traded options, which have different characteristics than
employee stock options, and changes to the subjective assumptions used in
the model can result in materially different fair value estimates. The
52
weighted-average grant date fair values of the options granted during 2001,
2000 and 1999 were based on the following assumptions:
Risk-Free Dividend
Interest Rates Yield
------------------------- ------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Performance-Based Incentive and other stock
option plans ........................... 3.75% 6.52% 5.89% 2.08% 2.50% 2.03%
Expected Lives Volatility
-------------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Performance-Based Incentive and other stock
option plans ........................... 6 years 6 years 6 years 36% 30% 20%
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 2001, 2000 and 1999 may not be
indicative of future amounts.
The following table summarizes information about stock options outstanding
at December 31, 2001.
Outstanding Exercisable
------------------------------------ -----------------------
Average Average Average
Exercise Life Exercise Exercise
Price Range Shares (Years) Price Shares Price
----------- ------ ------- ----- ------ -----
$3.06-$3.64 13,844 1.50 $ 3.64 13,844 $ 3.64
$4.00-$4.68 56,558 4.54 4.16 56,558 4.16
$5.00-$8.00 229,732 7.24 7.66 227,065 7.65
$9.00-$10.25 337,500 8.07 9.70 195,620 9.76
------- ---- ------- ------- -------
Total 637,634 7.32 $ 8.34 493,087 $ 7.97
======= ==== ======= ======= =======
Restricted Stock
The Company awarded 17,500 shares of restricted stock under the
Performance-Based Incentive Plan. The weighted average price of restricted
stock vested during 2001, 2000 and 1999 was $9.00, $8.64 and $8.00,
respectively. Compensation expense is recorded on restricted stock over the
related vesting period. Compensation expense is measured based on the fair
value of shares issued at the date of grant. At December 31, 2001, there was
no unrecognized restricted stock expense.
53
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the years ended December 31, 2001, 2000 and 1999 (dollars in
thousands, except per share data):
2001 2000 1999
---- ---- ----
Numerator:
Net income ........................................................ $2,941 $2,507 $2,941
Preferred stock dividends ......................................... - - -
----- ----- -----
Numerator for basic earnings per share
Income to common shareholders ................................... 2,941 2,507 2,941
Effect of dilutive securities:
Preferred stock dividends ....................................... - - -
----- ----- -----
Numerator for diluted earnings per share
Income available to common shareholders ......................... $2,941 $2,507 $2,941
====== ====== ======
Denominator:
Denominator for basic earnings per share
Weighted-average shares 6,094,670 6,095,471 5,995,474
Effects of dilutive securities:
Common stock options 93,807 38,799 74,263
----------- ----------- -----------
Dilutive potential common shares 93,807 38,799 74,263
----------- ----------- -----------
Denominator for diluted earnings per share
Adjusted weighted-average shares 6,188,477 6,134,270 6,069,737
----------- ----------- -----------
Basic Earnings Per Share $ 0.48 $ 0.41 $ 0.49
=========== =========== ===========
Diluted Earnings Per Share $ 0.48 $ 0.41 $ 0.48
=========== =========== ===========
For the years ended December 31, 2000 and 1999, shares that could
potentially be issued under options and potentially dilute basic earnings
per share in the future that were not included in the computation of
dilutive earnings per share because to do so would have been antidilutive,
totaled 275,145 and 117,842, respectively. There were no anti-dilutive
shares for the year ended December 31, 2001.
17. EMPLOYEE BENEFITS
Profit-Sharing Plan
The Company sponsors a 401(k) profit-sharing plan in which substantially all
full-time and part-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 and
paid by the plan sponsor totaled approximately $274,000, $214,000 and
$100,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
54
Health and Welfare Plan
The Company also provides health care, dental care, disability and life
insurance benefits to all full-time employees. Total cost related to these
benefits for 2001, 2000 and 1999 were approximately $653,000, $561,000 and
$453,000, respectively. Beginning in April 2001, full-time employees who
elected health care and/or dental care coverage contributed to a portion of
the monthly premium cost.
18. CAPITAL
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy
guidelines, the Company must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. Capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures as defined by regulation and established to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios of
Total and Tier I capital to risk-weighted assets and of Tier I capital to
average assets. If such minimum amounts and ratios are met, the Bank is
considered "adequately capitalized." If a bank exceeds the requirements of
"adequately capitalized" and meets even more stringent minimum standards, it
is considered to be "well capitalized." As of December 31, 2001, the Bank
meets all capital adequacy requirements to which it is subject.
The following table summarizes the actual and required capital levels and
ratios for the Company and the Bank at December 31, 2001 and 2000.
Adequately Well
Actual Capitalized Capitalized
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ----------- -------- ----------- -------
As of December 31, 2001:
Total capital (to risk-weighted assets):
Consolidated ....................... $44,745 9.0% $39,688 8.0% $49,611 10.0%
Bank ............................... 51,729 10.4% 39,667 8.0% 49,584 10.0%
Tier I capital (to risk-weighted assets):
Consolidated ....................... 39,540 8.0% 19,844 4.0% 29,767 6.0%
Bank ............................... 46,524 9.4% 19,834 4.0% 29,750 6.0%
Tier I capital (to average assets):
Consolidated ....................... 39,540 6.5% 24,242 4.0% 30,302 5.0%
Bank ............................... 46,524 7.7% 24,175 4.0% 30,219 5.0%
As of December 31, 2000:
Total capital (to risk-weighted assets):
Consolidated ....................... 47,306 12.0% 31,559 8.0% 39,448 10.0%
Bank ............................... 37,959 9.9% 30,838 8.0% 38,548 10.0%
Tier I capital (to risk-weighted assets):
Consolidated ....................... 43,636 11.1% 15,779 4.0% 23,669 6.0%
Bank ............................... 34,289 8.9% 15,419 4.0% 23,129 6.0%
Tier I capital (to average assets):
Consolidated ....................... 43,636 9.8% 17,862 4.0% 22,328 5.0%
Bank ............................... 34,289 7.8% 17,500 4.0% 21,875 5.0%
55
19. 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 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 $122,000,000 and
$77,000,000 at December 31, 2001 and 2000, 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
$7,373,000 and $6,760,000 of standby letters of credit outstanding at
December 31, 2001 and 2000, 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, 2001 and 2000 was approximately $250,000 and $8.8 million,
respectively. The decline in the required reserve level from 2000 to 2001
was due to a change by the Company in the application of Federal Reserve
regulations surrounding the definition of transaction accounts.
56
Legal Contingencies
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.
20. 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, federal funds purchased, securities sold under
repurchase agreements and other short term borrowings. 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.
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 loss against each respective
loan category.
Deposits
The fair values of non-interest 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.
Interest Rate Swap
The interest rate swap is recorded at fair value of $9,000 at
December 31, 2001. Fair value is based on a dealer quote at
December 31, 2001, which is estimated from market interest rate
curves as of the valuation date.
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, 2001 and 2000 and are based upon
fees charged to enter into similar arrangements as of these dates.
57
The Company's financial instruments that have estimated fair values
differing from their respective carrying values are presented as follows at
December 31, 2001 and 2000 (in thousands):
2001 2000
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Investment securities held to maturity ..... $ 4,060 $ 4,057 $ 7,460 $ 7,458
Net loans .................................. $516,350 $532,776 $377,151 $376,983
Financial liabilities:
Time deposits .............................. $268,537 $270,917 $185,739 $185,627
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, 2001, the
estimated fair values would necessarily have been achieved at that date,
since market values may differ depending on various circumstances. The
estimated fair values at December 31, 2001 are not necessarily indicative
of fair values at future dates.
21. BRANCH ACQUISITIONS
On May 11, 2001, the Company purchased the Lake City and Live Oak branches
of Republic Bank. The Company acquired loans and deposits of approximately
$12,000,000 and $62,000,000, respectively. The Company also recorded a core
deposit intangible of approximately $6,000,000, which is being amortized
over its estimated life of 10 years. The results of operations of these
branches are included in the results of operations of the Company from the
date of acquisition forward.
58
22. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY)
Statement of Financial Condition
December 31, 2001 and 2000
Assets
2001 2000
------------ ------------
(dollars in thousands)
Cash and cash equivalents ............................................... $ 2,764 $ 372
Investment in CNB National Bank ......................................... 53,563 35,153
Premises and equipment, net ............................................. - 8,800
Other assets ............................................................ 345 339
------------ ------------
Total assets .................................................... $ 56,672 $ 44,664
============ ============
Liabilities and Shareholders' Equity
LIABILITIES
Other borrowings ........................................................ $ 10,000 $ -
Other liabilities ....................................................... 3 28
------------ ------------
Total liabilities ............................................... 10,003 28
------------ ------------
SHAREHOLDERS' EQUITY
Common stock ............................................................ 61 61
Additional paid-in capital .............................................. 30,533 30,581
Retained earnings ....................................................... 15,749 14,027
Accumulated other comprehensive income (loss), net of taxes ............. 326 (33)
------------ ------------
Total shareholders' equity ...................................... 46,669 44,636
------------ ------------
Total liabilities and shareholders' equity ................. $ 56,672 $ 44,664
============ ============
59
Statement of Income
For the Year Ended December 31,
2001 2000 1999
---------- ---------- ----------
(dollars in thousands)
Dividend income ................................................ $ 824 $ 2,755 $ 1,679
Interest income ................................................ 25 71 298
Interest expense ............................................... (265) - -
-------- -------- --------
Net interest and dividend income ............................... 584 2,826 1,977
Noninterest income .............................................. 6 2 -
Noninterest expense ............................................. (154) (451) (1,016)
Realized gains (losses) on available for sale securities ....... 125 (50) -
-------- -------- --------
Income before income taxes and equity
in undistributed net income of subsidiary .................... 561 2,327 961
Income tax benefit .............................................. 98 160 268
-------- -------- --------
Income before equity in undistributed net income of subsidiary .. 659 2,487 1,229
Equity in undistributed net income of subsidiary ............... 2,282 20 1,712
-------- -------- --------
Net income ..................................................... $ 2,941 $ 2,507 $ 2,941
======== ======== ========
60
Statement of Cash Flows
For the Year Ended December 31,
2001 2000 1999
-------- -------- --------
(dollars in thousands)
Cash flows from operating activities:
Net income ................................................. $ 2,941 $ 2,507 $ 2,941
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Undistributed earnings of subsidiary .................... (2,282) (20) (1,712)
Depreciation ............................................ 87 41 -
Non-cash compensation ................................... 20 58 71
Realized gains on available for sale securities ......... (125) - -
Changes in assets and liabilities:
Other assets ............................................ (110) 187 (1,891)
Other liabilities ....................................... (25) 28 (10)
-------- -------- --------
Net cash provided by (used in) operating activities ... 506 2,801 (601)
-------- -------- --------
Cash flows from investing activities:
Cash paid related to investment in subsidiary .............. (7,000) - (10,000)
Cash paid related to land purchase ......................... - - (1,339)
Purchases - buildings and improvements ..................... - (5,010) -
Proceeds from sale of available for sale securities ........ 173 - -
Purchase of available for sale securities .................. - (98) -
-------- -------- --------
Net cash used in investing activities ................. (6,827) (5,108) (11,339)
-------- -------- --------
Cash flows from financing activities:
Proceeds from other borrowings ............................. 10,000 - -
Cash dividends ............................................. (1,219) (1,226) (1,159)
Proceeds from exercise of stock options .................... 166 113 11,377
Payment to repurchase common stock ......................... (234) (395) (96)
-------- -------- --------
Net cash provided by (used in) financing activities ... 8,713 (1,508) 10,122
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ 2,392 (3,815) (1,818)
Cash and cash equivalents, beginning of year .................... 372 4,187 6,005
-------- -------- --------
Cash and cash equivalents, end of year .......................... $ 2,764 $ 372 $ 4,187
======== ======== ========
During 2001, the Parent Company transferred its Deerwood and Gainesville
buildings, land and related equipment having a combined value of $8.7
million to the Bank as a capital contribution.
61
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
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 30, 2002.
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(i) 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(ii) 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(iii) 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(iv) 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.
99 Letter to the Commission regarding Arthur Andersen LLP's
quality control system.
Report of Form 8-K:
- -------------------
The Company did not file a form 8-K during the last quarter of 2001.
62
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: ____________________________
G. Thomas Frankland
Executive Vice President
and Chief Financial Officer
Date: March 28, 2002
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 28, 2002
Thomas R. Andrews
/s/ Audrey S. Bullard
---------------------- Director March 28, 2002
Audrey S. Bullard
/s/ Raymon J. Land
---------------------- Director March 28, 2002
Raymon J. Land
/s/ Jon W. Pritchett
---------------------- Director March 28, 2002
Jon W. Pritchett
/s/ Marvin H. Pritchett
---------------------- Director March 28, 2002
Marvin H. Pritchett
/s/ William J. Streicher
---------------------- Director March 28, 2002
William J. Streicher
/s/ Halcyon E. Skinner
---------------------- Director March 28, 2002
Halcyon E. Skinner
/s/ K. C. Trowell
---------------------- Chairman, CEO & Director March 28, 2002
K. C. Trowell
/s/ G. Thomas Frankland
---------------------- Executive Vice President March 28, 2002
G. Thomas Frankland and Chief Financial Officer
(Principal Financial Officer)
/s/ Martha S. Tucker
---------------------- Controller March 28, 2002
Martha S. Tucker (Principal Accounting Officer)
63