UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (no fee required)
For the quarterly period ended June 30, 2002
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (no fee required)
For the transition period from ________ to ________
Commission File No. 0-25988
CNB Florida Bancshares, Inc.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-2958616
------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9715 Gate Parkway North
Jacksonville, Florida 32246
- --------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 997-8484
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
The number of shares of the registrant's common stock outstanding as of July 31,
2002 was 6,106,703 shares, $0.01 par value per share.
CNB FLORIDA BANCSHARES, INC.
FINANCIAL REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statement of Financial Condition ........................................ 3
Consolidated Statement of Income .....................................................4
Consolidated Statement of Cash Flows ..................................................6
Notes to Consolidated Financial Statements ............................................7
Selected Financial Data ..............................................................10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview .............................................................................11
Results of Operations ................................................................11
Liquidity and Interest Rate Sensitivity...............................................14
Earning Assets........................................................................17
Funding Sources ......................................................................21
Capital Resources ....................................................................21
Item 3. Quantitative and Qualitative Disclosure About Market Risk ...................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...........................................................23
Item 2. Changes in Securities .......................................................23
Item 3. Defaults Upon Senior Securities .............................................23
Item 4. Submission of Matters to a Vote of Security Holders .........................23
Item 5. Other Information ...........................................................23
Item 6. Exhibits and Reports on Form 8-K ............................................23
2
PART I
FINANCIAL INFORMATION
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
ASSETS 2002 2001
--------- ---------
Cash and cash equivalents: (thousands)
Cash and due from banks $ 21,540 $ 17,993
Federal funds sold 950 2,100
Interest-bearing deposits in other banks 425 584
--------- ---------
Total cash and cash equivalents 22,915 20,677
Investment securities available for sale 41,943 33,003
Investment securities held to maturity 1,738 4,060
Loans:
Commercial, financial and agricultural 316,645 280,453
Real estate - mortgage 149,844 147,973
Real estate - construction 47,559 41,064
Installment and consumer 40,944 42,157
--------- ---------
Total loans, net of unearned income 554,992 511,647
Less: Allowance for loan losses (5,750) (5,205)
--------- ---------
Net loans 549,242 506,442
Loans held for sale 7,105 9,908
Premises and equipment, net 25,484 26,167
Intangible assets, net 6,428 6,802
Other assets 6,088 4,962
--------- ---------
TOTAL ASSETS $ 660,943 $ 612,021
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 83,662 $ 72,859
Savings, NOW and money market 218,461 191,495
Time under $100,000 151,670 152,986
Time $100,000 and over 133,740 115,551
--------- ---------
Total deposits 587,533 532,891
Securities sold under repurchase agreements and federal funds purchased 10,058 18,148
Other borrowings 10,000 10,000
Other liabilities 5,000 4,313
--------- ---------
Total liabilities 612,591 565,352
--------- ---------
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,
6,095,953 shares issued and outstanding at June 30, 2002 and
6,106,453 shares issued and outstanding at December 31, 2001 61
61
Additional paid-in capital 30,540 30,533
Retained earnings 17,466 15,749
Accumulated other comprehensive income, net of taxes 285 326
--------- ---------
Total shareholders' equity 48,352 46,669
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 660,943 $ 612,021
========= =========
See accompanying notes to unaudited consolidated finanicial statements.
3
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Six Months Ended
June 30,
2002 2001
----------- ----------
(thousands)
Interest Income
Interest and fees on loans $ 18,900 $ 18,447
Interest on investment securities available for sale 847 979
Interest on investment securities held to maturity 71 215
Interest on federal funds sold 43 28
Interest on interest-bearing deposits 5 2
----------- ----------
Total interest income 19,866 19,671
Interest Expense
Interest on deposits 7,177 8,643
Interest on repurchases and federal funds purchased 108 359
Interest on other borrowings 324 866
----------- ----------
Total interest expense 7,609 9,868
----------- ----------
Net interest income 12,257 9,803
Provision for Loan Losses 1,025 900
----------- ----------
Net interest income after provision for loan losses 11,232 8,903
Non-Interest Income
Service charges 1,562 1,395
Secondary market mortgage sales 994 746
Other fees and charges 344 315
Gain on called investment securities 4 -
----------- ----------
Total non-interest income 2,904 2,456
Non-Interest Expense
Salaries and employee benefits 5,526 4,977
Occupancy and equipment expenses 1,656 1,396
Other operating expenses 3,281 2,748
----------- ----------
Total non-interest expense 10,463 9,121
----------- ----------
Income before income taxes 3,673 2,238
Provision for income taxes 1,345 785
----------- ----------
NET INCOME $ 2,328 $ 1,453
=========== ==========
Earnings Per Share (Note 3):
Basic earnings per share $ 0.38 $ 0.24
=========== ==========
Weighted average shares outstanding 6,098,512 6,096,244
=========== ==========
Diluted earnings per share $ 0.38 $ 0.23
=========== ==========
Diluted weighted average shares outstanding 6,176,294 6,216,274
=========== ==========
Dividends Per Share $ 0.10 $ 0.10
=========== ==========
See accompanying notes to unaudited consolidated finanicial statements.
4
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
June 30,
2002 2001
---------- ----------
(thousands)
Interest Income
Interest and fees on loans $ 9,648 $ 9,540
Interest on investment securities available for sale 411 460
Interest on investment securities held to maturity 30 104
Interest on federal funds sold 29 12
Interest on interest-bearing deposits 4 -
---------- ----------
Total interest income 10,122 10,116
Interest Expense
Interest on deposits 3,512 4,513
Interest on repurchases and federal funds purchased 47 173
Interest on other borrowings 163 329
---------- ----------
Total interest expense 3,722 5,015
---------- ----------
Net interest income 6,400 5,101
Provision for Loan Losses 525 500
---------- ----------
Net interest income after provision for loan losses 5,875 4,601
Non-Interest Income
Service charges 822 750
Secondary market mortgage sales 521 551
Other fees and charges 153 136
Gain on called investment securities 4 -
---------- ----------
Total non-interest income 1,500 1,437
Non-Interest Expense
Salaries and employee benefits 2,783 2,564
Occupancy and equipment expenses 834 739
Other operating expenses 1,687 1,430
---------- ----------
Total non-interest expense 5,304 4,733
---------- ----------
Income before income taxes 2,071 1,305
Provision for income taxes 738 462
---------- ----------
NET INCOME $ 1,333 $ 843
========== ==========
Earnings Per Share (Note 3):
Basic earnings per share $ 0.22 $ 0.14
========== ==========
Weighted average shares outstanding 6,095,953 6,097,474
========== ==========
Diluted earnings per share $ 0.21 $ 0.14
========== ==========
Diluted weighted average shares outstanding 6,200,906 6,233,770
========== ==========
Dividends Per Share $ 0.05 $ 0.05
========== ==========
See accompanying notes to unaudited consolidated finanicial statements.
5
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
-------- --------
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,328 $ 1,453
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on called investment securities (4) -
Depreciation and amortization 1,236 819
Provision for loan loss 1,025 900
Investment securities amortization (accretion), net 91 (5)
Non-cash compensation - 14
Net proceeds from (origination of) loans held for sale 2,803 (11,444)
Changes in assets and liabilities:
Other assets (1,220) 251
Other liabilities 686 942
-------- --------
Net cash provided by (used in) operating activities 6,945 (7,070)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale (20,239) (27,511)
Proceeds from maturities of securities available for sale 3,234 18,358
Proceeds from maturities of securities held to maturity - 3
Proceeds from called securities available for sale 8,140 10,000
Proceeds from called securities held to maturity 2,321 1,242
Net increase in loans (43,826) (75,576)
Purchases of premises and equipment (179) (2,577)
Branches acquired from Republic Bank - 43,211
-------- --------
Net cash used in investing activities (50,549) (32,850)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 54,642 59,424
Net decrease in securities sold under repurchase agreements (8,090) (9,641)
and federal funds purchased
Net decrease in FHLB advances - (5,000)
Cash dividends (610) (610)
Repurchase of common stock (100) -
-------- --------
Net cash provided by financing activities 45,842 44,173
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,238 4,253
CASH AND CASH EQUIVALENTS, beginning of period 20,677 20,898
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 22,915 $ 25,151
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 8,399 $ 8,799
======== ========
Income taxes paid $ 1,267 $ 886
======== ========
See accompanying notes to unaudited consolidated finanicial statements.
6
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Note 1. Basis of Presentation and Accounting Policies
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q which do not require all information and
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. In the opinion of management, such
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the results for the
interim periods presented. Operating results for the six months ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. Management's discussion and analysis should be
read in conjunction with the consolidated financial statements. Certain amounts
and captions relating to 2001 have been reclassified to conform to current year
presentation.
Accounting policies followed in the presentation of interim financial results
are presented in Note 2 of CNB Florida Bancshares, Inc.'s (the "Company's")
audited consolidated financial statements included in Form 10-K for the year
ended December 31, 2001.
Note 2. Consolidation
The consolidated financial statements include the accounts of CNB Florida
Bancshares, Inc. and its wholly owned subsidiary, CNB National Bank. All
significant intercompany accounts and transactions have been eliminated.
Note 3. Earnings Per Share
Basic earnings per share is calculated based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
is calculated based on the weighted average number of shares of common stock
outstanding and common stock equivalents, consisting of outstanding stock
options that have a diluted effect on earnings per share. 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 outstanding during the periods ended
June 30, 2002 and 2001.
The following table sets forth the computation of earnings per share for the
each of the three and six month periods ended June 30, 2002 and 2001.
7
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Net income $ 1,333 $ 843 $ 2,328 $ 1,453
Preferred stock dividends - - - -
---------- ---------- ---------- ----------
Numerator for basic earnings per share
1,333 843 2,328 1,453
---------- ---------- ---------- ----------
Income to common shareholders
Effect of dilutive securities:
Preferred stock dividends - - - -
---------- ---------- ---------- ----------
Numerator for diluted earnings per share
Income available to common shareholders $ 1,333 $ 843 $ 2,328 $ 1,453
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
Weighted-average shares 6,095,953 6,097,474 6,098,512 6,096,244
Effect of dilutive securities:
Common stock options 104,953 136,296 77,782 120,030
---------- ---------- ---------- ----------
Dilutive potential common shares 104,953 136,296 77,782 120,030
---------- ---------- ---------- ----------
Denominator for diluted earnings per share
Adjusted weighted average shares 6,200,906 6,233,770 6,176,294 6,216,274
========== ========== ========== ==========
Basic earnings per share $ 0.22 $ 0.14 $ 0.38 $ 0.24
========== ========== ========== ==========
Diluted earnings per share $ 0.21 $ 0.14 $ 0.38 $ 0.23
========== ========== ========== ==========
Note 4. Comprehensive Income
Comprehensive income is defined as the total of net income and all other changes
in equity. The following table details the Company's comprehensive income for
the three and six months ending June 30, 2002 and 2001.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------- ------- -------- ---------
Unrealized gain (loss) recognized in other comprehensive
income (net):
Available for sale securities $ 421 $ 99 $ 160 $ 668
Interest rate swap designated as cash flow hedge (321) - (226) -
------- ------- ------- -------
Total unrealized gains (loss) before income taxes 100 99 (66) 668
Income taxes 37 37 (24) 249
------- ------- ------- -------
Net of tax $ 63 $ 62 $ (42) $ 419
======= ======= ======= =======
Amounts reported in net income:
Gain on sale of securities $ 4 $ - $ 4 $ -
Interest rate swap designated as cash flow hedge (69) - (140) -
Net amortization (accretion) 49 (1) 91 (5)
------- ------- ------- -------
Reclassification adjustment (16) (1) (45) (5)
Income taxes 6 - 17 2
------- ------- ------- -------
Reclassification adjustment, net of tax $ (10) $ (1) $ (28) $ (3)
======= ======= ======= =======
Amounts reported in other comprehensive income:
Net unrealized gain (loss) arising during period, net of tax $ 53 $ 61 $ (70) $ 416
Reclassification adjustment, net of tax 10 1 28 3
------- ------- ------- -------
Unrealized gain (loss) arising during period, net of tax 63 62 (42) 419
Net income 1,333 843 2,328 1,453
------- ------- ------- -------
Total comprehensive income $ 1,396 $ 905 $ 2,286 $ 1,872
======= ======= ======= =======
8
Note 5. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets
("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. Consequently,
there was no goodwill amortization recorded during the six months ended June 30,
2002. The Company recorded goodwill amortization expense of $35,000 for the six
months ended June 30, 2001. The carrying value of goodwill was $646,000 at June
30, 2002.
The Company's only other intangible assets consist of core deposit intangibles
that are being amortized over their estimated useful life of 10 years.
Amortization expense related to core deposit intangibles was $187,000 and
$374,000 for the three and six months ended June 30, 2002 and $27,000 and
$106,000 for the corresponding 2001 periods, respectively. Estimated
amortization expense on core deposit intangibles for the years ended December
31, 2002 through December 31, 2007 are as follows:
December 31, 2002 $746,000
December 31, 2003 $712,000
December 31, 2004 $638,000
December 31, 2005 $638,000
December 31, 2006 $634,000
December 31, 2007 $631,000
The gross carrying value and accumulated amortization related to core deposit
intangibles was $7.6 million and $1.8 million at June 30, 2002, respectively.
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. The Company completed the transitional
goodwill impairment test during the first quarter of 2002 and determined that
goodwill at transition was not impaired. In addition, the remaining useful life
of the core deposit intangible asset was reviewed and considered to be
appropriate.
In June 2001, the FASB issued FAS 143, Accounting for Asset Retirement
Obligations. FAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Although earlier application is encouraged,
FAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company believes the adoption of FAS 143 will not have
a significant impact on the Company's consolidated financial statements.
In August 2001, the FASB issued FAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. FAS 144 supersedes FAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. FAS 144 also amends Accounting Research Bulletins No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company
believes the adoption of FAS 144 will not have a significant impact on the
Company's consolidated financial statements.
In May 2001, the FASB issued FAS 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. FAS 145
rescinds FAS 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FAS 64, Extinguishments of Debt Made to Satisfy
Sinking-Funds Requirements. FAS 145 also rescinds FAS 44, Accounting for
Intangible Assets of Motor Carriers and amends FAS 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
Company believes the adoption of FAS 145 will not have a significant impact on
the Company's consolidated financial statements.
In June 2002, the FASB issued FAS 146, Accounting for Costs Associated with Exit
or Disposal Activities. FAS 146 addresses financial accounting and reporting for
9
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The Company believes the adoption of FAS 146
will not have a significant impact on the Company's consolidated financial
statements.
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
Selected Financial Data
Six Months Ended June 30,
2002 2001
-------- -------
Dollars in thousands except per share information
=================================================================================================
SUMMARY OF OPERATIONS:
Total interest income $ 19,866 $ 19,671
Total interest expense (7,609) (9,868)
----------- ------------
Net interest income 12,257 9,803
Provision for loan losses (1,025) (900)
----------- ------------
Net interest income after provision for loan losses 11,232 8,903
Non-interest income 2,904 2,456
Non-interest expense (10,463) (9,121)
----------- ------------
Income before taxes 3,673 2,238
Income taxes (1,345) (785)
----------- ------------
Net income $ 2,328 $ 1,453
=========== ============
===============================================================================================
PER COMMON SHARE:
Basic earnings $ 0.38 $ 0.24
Diluted earnings 0.38 0.23
Book value 7.93 7.53
Dividends 0.10 0.10
Actual shares outstanding 6,095,953 6,099,376
Weighted average shares outstanding 6,098,512 6,096,244
Diluted weighted average shares outstanding 6,176,294 6,216,274
===============================================================================================
KEY RATIOS:
Return on average assets 0.75% 0.57%
Return on average shareholders' equity 9.83 6.47
Dividend payout 26.32 41.67
Efficiency ratio 69.01 74.40
Total risk-based capital ratio 8.66 9.24
Average shareholders' equity to average assets 7.61 8.89
Tier 1 leverage 6.56 7.31
===============================================================================================
FINANCIAL CONDITION AT PERIOD-END:
Assets $660,943 $576,959
Loans 554,992 467,659
Deposits 587,533 489,476
Shareholders' equity 48,352 45,911
===============================================================================================
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following analysis reviews important factors affecting the financial
condition and results of operations of CNB Florida Bancshares, Inc. for the
three and six months ended June 30, 2002 and 2001. This financial information
should be read in conjunction with the unaudited consolidated financial
statements of CNB Florida Bancshares, Inc. ("the Company") and its wholly owned
subsidiary, CNB National Bank ("the Bank"), included in "Item 1. Financial
Statements" above and the audited consolidated financial statements included in
Form 10-K for the year ended December 31, 2001. The analysis contains
forward-looking statements with respect to financial and business matters, which
are subject to risks and uncertainties, that may change over a period of time.
These risks and uncertainties include but are not limited to changes in the
interest rate environment that may reduce margins, general economic or business
conditions in the Company's markets that lead to a deterioration in credit
quality or reduced loan demand, legislative or regulatory changes and
competitors of the Company that may have greater financial resources and develop
products or services that enable such competitors to compete more successfully
than the Company. Other factors that may cause actual results to differ from the
forward-looking statements include customer acceptance of new products and
services, changes in customer spending and saving habits and the Company's
success in managing costs associated with expansion. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. Actual results could be significantly different from the
forward-looking statements contained herein. The Company has no foreign
operations; accordingly, there are no assets or liabilities attributable to
foreign operations.
RESULTS OF OPERATIONS
The Company's earnings for the three month period ended June 30, 2002 were
$1.3 million, or $0.21 per diluted share, compared to $843,000, or $0.14 per
diluted share, in the second quarter of 2001. For the six months ended June 30,
2002, net income was $2.3 million or $0.38 per diluted share, compared to $1.5
million, or $0.23 per diluted share for the comparable 2001 period. Total assets
increased to $660.9 million at June 30, 2002 compared to $577.0 million at June
30, 2001, an increase of 15%. Total outstanding loans and deposits rose 19% and
20% to $555.0 million and $587.5 million, respectively, at June 30, 2002 from
$467.7 million and $489.5 million, respectively, at the same period in 2001.
Net Interest Income
Net interest income is the single largest source of revenue for the Bank
and consists of interest and fee income generated by earning assets, less
interest expense paid on interest bearing liabilities. The Company's primary
objective is to manage its assets and liabilities to provide the largest
possible amount of income while balancing interest rate, credit quality,
liquidity and capital risks. Net interest income for the first half of 2002 was
$12.3 million, compared to $9.8 million for the first six months in 2001, an
increase of 25%. The increase was primarily due to loan and deposit growth and
improved rates and spreads, partially offset by lower loan fees.
Total average earning assets increased $113.7 million, or 25% to $573.6
million in 2002, compared to $460.0 million in 2001. The primary driver of this
increase was an increase in the average balance of loans of $110 million.
Increases in interest bearing deposits, including those accounts acquired from
Republic Bank in May 2001, were the main contributors in the $96.9 million, or
24%, growth in average interest bearing liabilities.
Net interest margin remained consistent in 2002 compared to the same period
in 2001. Total earning asset yields decreased to 6.98% in 2002 from 8.63% in
2001 and rates on interest-bearing liabilities decreased to 3.08% in 2002 from
4.96% in 2001. The decline in earning asset yields is reflective of a drop in
the Bank's prime rate of 475 basis points during 2001. The lower rates on
interest bearing liabilities reflects a change in funding mix away from
higher-cost sources to lower cost deposits, coupled with the lower interest rate
environment. The Company continues to benefit from a reduction in funding costs
as higher-rate certificates of deposit mature and are rolled over in today's
lower rate environment. However, the positive impact of this benefit is expected
to decline over the remainder of 2002 as the spread between maturing deposits
and current interest rates is compressed. Table 1: "Average Balances - Yields
11
and Rates" provides the Company's average volume of interest earning assets and
interest bearing liabilities for the first half of 2002 and 2001.
Table 1: Average Balances - Yields and Rates
(Unaudited)
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
-------------------------------- ------------------------------
Interest Interest
Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(dollars in thousands)
ASSETS:
Federal funds sold $ 5,234 $ 43 1.66% $ 1,154 $ 28 4.89%
Investment securities
available for sale 37,982 847 4.50 33,128 979 5.96
Investment securities
held to maturity 2,364 71 6.06 7,039 215 6.16
Loans (1) 527,419 18,900 7.23 418,321 18,447 8.89
Interest bearing deposits 553 5 1.82 213 2 1.90
---------- ---------- ---- --------- ---------- ----
TOTAL EARNING ASSETS 573,552 19,866 6.98 459,855 19,671 8.63
All other assets 54,643 49,775
---------- ---------
TOTAL ASSETS $ 628,195 $ 509,630
========== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW and money markets $ 179,827 $ 1,580 1.77% $ 128,930 $ 1,940 3.03%
Savings 21,526 80 0.75 17,535 109 1.25
Time deposits 272,248 5,517 4.09 208,841 6,594 6.37
Repurchases and federal
funds purchased 14,555 108 1.50 14,918 359 4.85
Short term borrowings - - - 31,077 866 5.62
Other borrowings 10,000 324 6.53 - - -
---------- ---------- ---- --------- ---------- ----
TOTAL INTEREST BEARING
LIABILITIES 498,156 7,609 3.08 401,301 9,868 4.96
Demand deposits 77,613 57,351
Other liabilities 4,651 5,676
Shareholders' equity 47,775 45,302
---------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 628,195 $ 509,630
========== =========
---- ----
INTEREST SPREAD (2) 3.90% 3.67%
==== ====
---------- ----------
NET INTEREST INCOME $ 12,257 $ 9,803
========== ==========
NET INTEREST MARGIN (3) 4.31% 4.30 %
==== ====
- ----------
(1) Interest income on average loans includes loan fee recognition of $234,000
and $726,000 in 2002 and 2001, respectively.
(2) Represents the average rate earned minus average rate paid.
(3) Represents net interest income divided by total earning assets.
12
Table 1a: Analysis of Changes in Interest Income and Expense
(Unaudited)
NET CHANGE JUNE 30, NET CHANGE JUNE 30,
2001-2002 ATTRIBUTABLE TO: 2000-2001 ATTRIBUTABLE TO:
-------------------------- --------------------------
Net Net
Volume (1) Rate (2) Change Volume (1) Rate (2) Change
---------- -------- ------ ---------- -------- ------
(thousands)
INTEREST INCOME:
Federal funds sold $ 99 $ (84) $ 15 $ (125) $ (7) $ (132)
Investment securities available for sale 143 (275) (132) (13) (69) (82)
Investment securities held to maturity (142) (2) (144) (96) 14 (82)
Loans 4,810 (4,357) 453 5,720 (315) 5,405
Interest bearing deposits 3 - 3 (33) (5) (38)
------- ------- ------- ------- ------- -------
Total 4,913 (4,718) 195 5,453 (382) 5,071
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW and money markets 766 (1,126) (360) 346 (120) 226
Savings 25 (54) (29) - (13) (13)
Time deposits 2,002 (3,079) (1,077) 1,771 823 2,594
Repurchases and federal funds
purchased (9) (242) (251) 217 (48) 169
Short term borrowings (866) - (866) 823 (126) 697
Other borrowings 324 - 324 - - -
------- ------- ------- ------- ------- -------
Total 2,242 (4,501) (2,259) 3,157 516 3,673
------- ------- ------- ------- ------- -------
Net interest income $ 2,671 $ (217) $ 2,454 $ 2,296 $ (898) $ 1,398
======= ======= ======= ======= ======= =======
- ----------
(1) The volume variance reflects the change in the average balance outstanding
multiplied by the actual average rate during the prior period.
(2) The rate variance reflects the change in the actual average rate multiplied
by the average balance outstanding during the prior period. Changes which
are not solely due to volume changes or solely due to rate changes have
been attributed to rate changes.
Non-Interest Income
Non-interest income for the three and six months ended June 30, 2002
increased $63,000, or 4% and $448,000, or 18%, respectively, for the comparable
periods in 2001. The increase in the three month period was primarily attributed
to fees associated with the increased deposit base. The increase in the six
month period was mainly attributable to mortgage loan originations and the
increased deposit base. Income from secondary market mortgage loan sales is
highly dependent on mortgage loan origination volumes and the overall level of
mortgage loan activity. Service charges on deposit accounts increased $167,000,
or 12% in the first half of 2002 compared to the same period in 2001. Other fee
income, which includes credit card fees, credit life insurance income, safe
deposit box fees, net gains and losses from sale of securities and other
miscellaneous fees, increased $33,000, or 10% for the first six months of 2002
compared to the comparable 2001 period.
Non-interest income, annualized, as a percentage of average assets was
0.93% for the six months ended June 30, 2002, compared to 0.97% for the
comparable period in 2001.
Non-Interest Expense
Non-interest expense was $5.3 million and $10.5 million for the three and
six month periods ended June 30, 2002 compared to $4.7 million and $9.1 million
for the respective 2001 periods, an increase of 12% and 15%, respectively. This
increase is primarily attributable to higher personnel costs resulting from the
build-out of the Company's production and operational platform during the last
two years. Non-interest expense also increased as a result of higher data
13
processing costs resulting from a larger customer base and increased transaction
activity and the amortization of the core deposit intangible recorded in
connection with the 2001 Republic Bank branch acquisitions. Annualized,
non-interest expense as a percentage of average assets was 3.36% for the first
half of 2002, compared to 3.61% for the 2001 comparable period, reflecting the
realization of efficiencies gained through the expansion of our production and
operational platform. Salaries and employee benefits increased $549,000 or 11%
to $5.5 million for the first half of 2002, compared to $5.0 million for the
same period in 2001. As a percentage of average assets annualized, salaries and
employee benefits decreased to 1.77% from 1.97%, for the first half of 2002 and
2001, respectively. Average full-time equivalent employees increased by 10 from
June 30, 2001 to June 30, 2002.
Occupancy expense (including premises, furniture, fixtures and equipment)
increased in the three and six month periods of 2002 by $95,000, or 13% and
$260,000, or 19%, respectively, over the comparable periods in 2001. The
increase is primarily attributable to costs associated with the two new de novo
branches in the First Coast Division and the purchase of the two branches from
Republic Bank in May 2001. Costs associated with the branches include property
taxes and depreciation on equipment of $63,000 and $118,000 for the three and
six months ended June 30, 2002, respectively.
Other operating expenses increased $533,000, or 19%, in the first half of
2002 compared to the same period in 2001. The following table details the areas
of significance in other operating expenses.
Table 2: Other Operating Expenses
Six Months Ended June 30,
2002 2001
---------- -----------
(thousands)
Data processing $ 662 $ 492
Legal and professional 408 220
Amortization of intangible assets 374 141
Telephone 362 269
Postage and delivery 354 290
Advertising and promotion 218 281
Supplies 217 289
Regulatory fees 117 86
Administrative 86 99
Loan expenses 71 131
Education expense 64 41
Dues and subscriptions 49 45
Other general operating 49 28
Directors fees 42 38
Insurance and bonding 39 70
Other 169 228
-------- --------
Total other operating expenses $ 3,281 $ 2,748
======== ========
Income Taxes
The Company's income tax expense in interim reporting periods is determined
by estimating the combined federal and state effective tax rate for the year and
applying such rate to interim pre-tax income. The Company's estimated annual
effective tax rate for 2002 is approximately 35%.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is defined as the ability of the Company to meet anticipated
demands for funds under credit commitments and deposit withdrawals at a
reasonable cost on a timely basis. Management measures the Company's liquidity
position by giving consideration to both on-and off-balance sheet sources of and
demands for funds on a daily and weekly basis. These funds can be obtained by
converting assets to cash or by attracting new deposits. Average liquid assets
(cash and amounts due from banks, interest bearing deposits in other banks,
federal funds sold and investment securities available for sale) totaled $61.1
14
million and represented 11% of average total deposits during the first half of
2002, compared to $54.4 million and 13% for 2001. Average loans were 96% and
101% of average deposits for the six month period ended June 30, 2002 and 2001,
respectively.
In addition to core deposit growth, sources of funds available to meet
liquidity demands include cash received through ordinary business activities
such as the collection of interest and fees, federal funds sold, loan and
investment maturities, lines for the purchase of federal funds by the Company
from its principal correspondent banks. 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 has a $3 million line of credit with one of its correspondent banks.
The line of credit originally matured on June 30, 2002 with interest floating
quarterly at 3-month Libor plus 145 basis points. During July 2002, the line was
renewed under the same terms, with a maturity date of June 30, 2003. There are
no amounts outstanding on the $3 million line of credit. The line of credit is
collateralized by 100% of the common stock of the Bank.
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities, at a given time interval, including both
floating rate instruments and instruments that are approaching maturity.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize the
overall interest rate risk to the Company.
The Company's gap and liquidity positions are reviewed on a regular basis
by management to determine whether or not changes in policies and procedures are
necessary to achieve financial goals. This analysis includes assumptions about
balance sheet growth and related mix as well as pricing and maturity profile.
Included in the review is an internal analysis of the possible impact on net
interest income due to market changes in interest rates. Based on this internal
analysis, at June 30, 2002, a gradual increase in interest rates of 200 basis
points would have increased net interest income over the ensuing twelve-month
period by 2.92% as compared to a projection under stable rates. A gradual
decrease in interest rates of 200 basis points over this same period would have
decreased net interest income by 2.66% 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 2.27% and (1.60)%, 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. The
computations of interest rate risk do not necessarily include certain actions
that management may undertake to manage this risk in response to anticipated
changes in interest rates.
Table 3, "Rate Sensitivity Analysis", presents rate sensitive assets and
liabilities, separating the assets and liabilities into fixed and variable
interest rate categories. The estimated fair value of each instrument category
is also shown in the table. While these fair values are based on management's
judgment of the most appropriate factors, there is no assurance that, were the
Company to have disposed of such instruments at June 30, 2002, the estimated
fair values would necessarily have been achieved at that date, since market
values may differ depending on various circumstances.
15
Table 3: Rate Sensitivity Analysis
June 30, 2002
(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 $ 87,623 $ 46,689 $ 39,508 $ 30,471 $ 45,311 $ 87,600 $ 337,202 $ 346,722
Average interest rate 7.34% 7.87% 7.93% 8.03% 7.57% 7.33% 7.57%
Variable rate loans 66,367 24,746 12,583 20,112 10,739 83,243 217,790 225,383
Average interest rate 5.43% 5.54% 6.34% 5.63% 6.33% 7.40% 6.31%
Investment securities (1)
Fixed rate investments 9,759 10,000 5,483 8,220 - 5,964 39,426 40,038
Average interest rate 2.44% 6.05% 4.18% 4.94% 4.84% 4.48%
Variable rate investments - - - - 39 566 605 617
Average interest rate 2.50% 5.35% 5.17%
Federal funds sold 950 - - - - - 950 950
Average interest rate 1.68% 1.68%
Other earning assets (2) 3,404 - - - - - 3,404 3,403
Average interest rate 5.49% 5.49%
--------- -------- -------- -------- -------- -------- --------- ---------
Total interest-earning assets $ 168,103 $ 81,435 $ 57,574 $ 58,803 $ 56,089 $177,373 $ 599,377 $ 617,113
Average interest rate 6.23% 6.94% 7.23% 6.78% 7.33% 7.27% 6.89%
========= ======== ======== ======== ======== ======== ========= =========
INTEREST-BEARING LIABILITIES:
- -----------------------------
NOW $ 61,930 $ - $ - $ - $ - $ 55,587 $ 117,517 $ 117,517
Average interest rate 2.13% 0.50% 1.36%
Money market 74,168 - - - - 4,471 78,639 78,639
Average interest rate 2.48% 1.59% 2.43%
Savings - - - - - 22,305 22,305 22,305
Average interest rate 0.75% 0.75%
CD's under $100,000 115,194 12,105 20,071 4,083 217 - 151,670 152,459
Average interest rate 3.34% 4.04% 4.14% 4.58% 4.77% 3.54%
CD's $100,000 and over 114,830 6,578 9,811 1,920 601 - 133,740 134,736
Average interest rate 3.88% 4.31% 4.40% 5.20% 5.33% 3.96%
Securities sold under
repurchase agreements and
federal funds purchased 10,058 - - - - - 10,058 10,058
Average interest rate 1.45% 1.45%
Other borrowings (3) - - - - 10,000 - 10,000 10,000
Average interest rate 3.73% 3.73%
--------- -------- -------- -------- -------- -------- --------- ---------
Total interest-bearing liabilities $ 376,180 $ 18,683 $ 29,882 $ 6,003 $ 10,818 $ 82,363 $ 523,929 $ 525,714
Average interest rate 3.09% 4.14% 4.23% 4.78% 3.84% 0.63% 2.84%
========= ======== ======== ======== ======== ======== ========= =========
- ----------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net unrealized gains of $671,000.
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank
Stock, Federal Home Loan Bank Stock and other marketable equity securities.
(3) Other borrowings consists of a term loan maturing October 3, 2006 that
bears interest at 3-month Libor plus 170 basis points. The variable rate is
reset quarterly. The variable interest payments on the term loan are being
hedged through an interest rate swap. Under the interest rate swap, the
Company pays a fixed rate of interest of 6.45% and receives a floating rate
of interest of 3-month Libor plus 170 basis points. Other terms of the swap
mirror those of the term debt.
16
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, were 77% of total deposits at June 30, 2002, down slightly
from 78% at December 31, 2001. The Bank closely monitors its reliance on time
deposits in excess of $100,000, which are generally considered less stable and
less reliable than core deposits. Table 11, below, sets forth the amounts of
time deposits with balances of $100,000 or more that mature within indicated
periods. The Bank does not, nor has it ever, solicited brokered deposits.
Table 4: Maturity of Time Deposits of $100,000 or More
June 30, 2002
(dollars in thousands)
Amount
------
Three months or less $ 39,398
Three through six months 30,700
Six through twelve months 44,732
Over twelve months 18,910
---------
Total $ 133,740
=========
EARNING ASSETS
Loans Lending activities are the Company's single largest source of
revenue. Although management is continually evaluating alternative sources of
revenue, lending is the major segment of the Company's business and is key to
profitability. During the first half of 2002, average loans were $527.4 million
and were 96% of average deposits, compared to $418.3 million and 101% for the
same period in 2001. The following table reflects the composition of the
Company's loan portfolio as of June 30, 2002 compared to December 31, 2001.
Table 5: Loan Portfolio Composition
June 30, December 31,
2002 2001
-------------- ---------------
(thousands)
Commercial, financial and agricultural $ 316,645 $ 280,453
Real estate - mortgage 149,844 147,973
Real estate - construction 47,559 41,064
Installment and consumer 40,944 42,157
---------- -----------
Total loans, net of unearned income 554,992 511,647
Less: allowance for loan losses (5,750) (5,205)
---------- -----------
Net loans $ 549,242 $ 506,442
========== ===========
Loan concentrations are considered to exist where there are amounts loaned
to multiple borrowers engaged in similar activities which collectively would be
similarly impacted by economic or other conditions and when the total of such
amounts exceeds 25% of total capital. Due to the lack of diversified industry
and the relative proximity of markets served, the Company has concentrations of
loans from the North Florida region as well as the types of loans funded. The
Bank's four largest concentration categories are: Land Development, Commercial
Real Estate, Professional and Residential Real Estate.
Loan Quality
The allowance for loan loss is an amount that management believes will be
adequate to absorb inherent losses on existing loans that are probable of
becoming uncollectible based on evaluations of the collectibility of the loans.
The 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
17
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 June 30, 2002, was 1.04% of total loans,
compared to 1.02% at December 31, 2001 and 0.97% at June 30, 2001. Table 6:
"Allocation of Allowance for Loan Losses", set forth below, indicates the
specific reserves allocated by loan type.
Table 6: Allocation of Allowance for Loan Losses
June 30, December 31,
2002 2001
--------------------- ---------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(dollars in thousands)
Commercial, financial
and agricultural $ 4,012 57.0% $ 3,669 53.8%
Real estate - mortgage 613 27.0% 484 30.3%
Real estate- construction 32 8.6% 25 7.9%
Consumer 1,046 7.4% 932 8.0%
Unallocated 47 - 95 -
-------- ----- --------- -----
Total $ 5,750 100.0% $ 5,205 100.0%
======== ===== ========= =====
Non-performing assets consist of non-accrual loans, loans past due 90 days
or more and still accruing interest, other real estate owned and repossessions.
Non-performing assets increased 22% from December 31, 2001 to $3.5 million at
June 30, 2002. Non-performing assets as a percentage of total assets increased
to 0.53% on June 30, 2002 from 0.47% on December 31, 2001.
Table 7: Non-Performing Assets
June 30, December 31,
2002 2001
---- ----
(dollars in thousands)
Non-accrual loans $ 2,357 $ 1,377
Past due loans 90 days or
more and still accruing 941 1,271
Other real estate owned
and repossessions 202 229
------- --------
Total non-performing assets $ 3,500 $ 2,877
======= ========
Percent of total assets 0.53% 0.47%
18
Table 8: Activity in Allowance for Loan Losses
June 30,
2002 2001
---- ----
(dollars in thousands)
Balance at beginning of year $ 5,205 $ 3,670
Allowance acquired by acquisition 110
Loans charged-off:
Commercial, financial and agricultural 284 50
Real estate, mortgage 68 34
Real estate, construction - -
Consumer 212 174
---------- ----------
Total loans charged-off (564) (258)
Recoveries on loans previously charged-off:
Commercial, financial and agricultural 9 48
Real estate, mortgage 29 21
Real estate, construction - -
Consumer 46 67
---------- ----------
Total loan recoveries 84 136
---------- ----------
Net loans charged-off (480) (122)
---------- ----------
Provision for loan losses charged to expense 1,025 900
---------- ----------
Ending balance $ 5,750 $ 4,558
========== ==========
Total loans outstanding $ 554,992 $ 467,659
Average loans outstanding $ 527,419 $ 418,321
Allowance for loan losses to loans outstanding 1.04% 0.97%
Net charge-offs to average loans outstanding, annualized 0.18% 0.06%
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 $43.7 million at June 30, 2002, an increase of 18% from $37.1
million at the end of 2001.
Securities are classified as either held-to-maturity or available-for-sale.
Securities available-for-sale, which made up 96% of the total investment
portfolio at June 30, 2002 had a value of $41.9 million. Securities in the
available-for-sale portfolio are recorded at fair value on the balance sheet and
unrealized gains and losses associated with these securities are recorded, net
of tax, as a separate component of shareholders' equity. At June 30, 2002,
shareholders' equity included a net unrealized gain of $421,000, compared to a
$320,000 net unrealized gain at December 31, 2001.
The Company invests primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States and
obligations of agencies of the United States government. In addition, the
Company enters into federal funds transactions with its principal correspondent
banks. The Federal Reserve Bank and FHLB also require equity investments to be
maintained by the Company.
The following tables set forth the maturity distribution and the weighted
average yields of the Company's investment portfolio.
19
Table 9: Maturity Distribution of Investment Securities (1)
June 30, 2002
(dollars in thousands) Held to Maturity Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
---- ------------ ---- ------------
U.S. Treasury:
One year or less $ - $ - $ 4,061 $ 4,070
-------- -------- ------- -------
Total U.S. Treasury - - 4,061 4,070
U.S. Government Agencies
and Corporations:
One year or less - - 5,609 5,627
Over one through five years 1,738 1,691 21,965 22,564
-------- -------- ------- -------
Total U.S. Government Agencies 1,738 1,691 27,574 28,191
and Corporations
Obligations of State and Political
Subdivisions:
One year or less - - 90 90
Over ten years - - 608 647
-------- -------- ------- -------
Total Obligations of State and - - 698 737
Political Subdivisions
Mortgage-Backed Securities (2):
Over one through five years - - 38 39
Over five through ten years - - 4,472 4,469
Over ten years - - 1,450 1,458
-------- -------- ------- -------
Total Mortgage-Backed Securities - - 5,960 5,966
Other Securities:
Over ten years (3) - - 2,979 2,979
-------- -------- ------- -------
Total Other Securities - - 2,979 2,979
-------- -------- ------- -------
Total Securities $ 1,738 $ 1,691 $41,272 $41,943
======= ======= ======= =======
- ----------
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Represents investments in mortgage-backed securities which are subject to
early repayment.
(3) Represents investment in Federal Reserve Bank and Federal Home Loan Bank
stock and other marketable equity securities.
Table 10: Weighted Average Yield by Range of Maturities
June 30, 2002 December 31, 2001 June 30, 2001
------------- ----------------- -------------
One Year or Less 2.44% 2.56% 5.16%
More than One through Five Years 5.23% 5.72% 6.06%
More than Five through Ten Years 4.99% 4.95% 5.80%
More than Ten Years (1) 4.58% 4.96% 6.63%
- ----------
(1) Represents adjustable rate mortgage-backed securities which are repriceable
within one year.
20
Other Earning Assets
Temporary investment needs are created in the day-to-day liquidity movement
of the Bank and are satisfied by selling excess funds overnight (Fed Funds Sold)
to larger, well capitalized banking institutions. If these funds become
excessive, management determines what portion, if any, of the liquidity may be
rolled into longer term investments as securities.
FUNDING SOURCES
Deposits
The Bank does not rely on purchased or brokered deposits as a source of
funds. Instead, competing for deposits within its market area serves as the
Bank's fundamental tool in providing a source of funds to be invested primarily
in loans. The following table sets forth certain deposit categories for the
periods ended June 30, 2002 and December 31, 2001.
Table 11: Total Deposits
June 30, December 31,
2002 2001
---- ----
(thousands)
Non-interest bearing:
Demand checking $ 83,662 $ 72,859
Interest bearing:
NOW checking 117,517 105,157
Money market checking 78,639 66,088
Savings 22,305 20,250
Certificates of deposit 285,410 268,537
---------- ----------
Total deposits $ 587,533 $ 532,891
========== ==========
CAPITAL RESOURCES
Shareholders' equity at June 30, 2002 was $48.4 million, as compared to
$46.7 million at December 31, 2001. During the first and second quarter of 2002,
the Board of Directors declared quarterly dividends totaling $0.05 per share,
consistent with 2001. At June 30, 2002, the Company's common stock had a book
value of $7.93 per share compared to $7.64 per share at December 31, 2001.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy guidelines,
the Company must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
component, risk weightings and other factors.
Quantitative measures as defined by regulation and established to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios of
Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average
assets. If such minimum amounts and ratios are met, the Bank is considered
"adequately capitalized." If a bank exceeds the requirements of "adequately
capitalized" and meets even more stringent minimum standards, it is considered
to be "well capitalized." As of June 30, 2002, the Bank met all capital adequacy
requirements to which it is subject.
At June 30, 2002 and 2001, the Company's Tier 1 capital, Total risk-based
capital and Tier 1 leverage ratios were are as follows:
21
Table 12: Capital Ratios
June 30, Well-Capitalized Regulatory
2002 2001 Requirements Minimums
---- ---- ------------ --------
Risk Based Capital Ratios:
Tier 1 Capital Ratio 7.6% 8.3% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 8.7% 9.2% 10.0% 8.0%
Tier 1 Leverage Ratio 6.6% 7.3% 5.0% 4.0%
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange Commission adopted
amendments to Regulation S-K, Regulation S-X, and various forms (Securities Act
Release No. 7386) to clarify and expand existing requirements for disclosures
about derivatives and market risks inherent in derivatives and other financial
instruments. As noted below, at June 30, 2002, 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 June 30,
2002, including interest accruals, was approximately ($217,000). The swap is
being accounted for as a cash flow hedge of the variable interest payments under
the $10 million term debt. Changes in the fair value of the swap, net of taxes,
are recorded as a separate component of shareholders' equity. Amounts are
transferred from equity to earnings as the hedged transactions are reflected in
income.
Non-derivative financial instruments that have market risk are included in
Table 3: "Rate Sensitivity Analysis". These instruments are shown by maturity,
separated by fixed and variable interest rates. The estimated fair value of each
instrument category is also shown in the table. While these estimates of fair
value are based on management's judgment of the most appropriate factors, there
is no assurance that, were the Company to have disposed of such instruments at
June 30, 2002, the estimated fair values would necessarily have been achieved at
that date, since market values may differ depending on various circumstances.
The estimated fair values at June 30, 2002 would not necessarily be considered
to apply at subsequent dates.
22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - There are no material pending legal proceedings
to which the Company or any of its subsidiaries is a party or of which
any of their property is the subject.
Item 2. Changes in Securities - Not applicable.
Item 3. Defaults Upon Senior Securities - Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders - On May 22, 2002,
the Company held its Annual Meeting of Shareholders, whereby the Board
of Directors (Thomas R. Andrews, Audrey S. Bullard, Raymon Land,
Sr., Jon W. Pritchett, Marvin H. Pritchett, Halcyon E. Skinner, William
Streicher and K. C. Trowell) all were re-elected. The following
summarizes all matters submitted and voted upon at this annual meeting:
(a) The following directors were elected to serve on the Board of
Directors. These individuals served on the Board of Directors prior to
the Annual Meeting. The number of votes cast were as follows:
Against/ Abstentions/
For Withheld Broker Non-Votes
--- -------- ----------------
Thomas R. Andrews 4,902,736 15,828 0
Audrey S. Bullard 4,902,736 15,828 0
Raymon Land, Sr. 4,869,542 49,022 0
Jon W. Pritchett 4,902,636 15,928 0
Marvin H. Pritchett 4,902,736 15,828 0
Halcyon E. Skinner 4,902,736 15,828 0
William Streicher 4,902,736 15,828 0
K. C. Trowell 4,868,542 50,022 0
Item 5. Other Information - Not applicable.
Item 6. Exhibits and Reports on Form 8-K -
(a) Exhibits:
99.1 Chief Executive Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On May 22, 2002, the Company filed a Form 8-K to report a change in
accountants. The Company dismissed Arthur Andersen LLP and appointed
PricewaterhouseCoopers LLP as its new independent accountants.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Florida Bancshares, Inc.
----------------------------
(Registrant)
By: /s/ G. Thomas Frankland
-----------------------------
G. Thomas Frankland
Executive Vice President
and Chief Financial Officer
Date: August 14, 2002
24