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 September 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 October
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 ............................................................................................ 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview ........................................................................................................... 12
Results of Operations .............................................................................................. 12
Liquidity and Interest Rate Sensitivity ............................................................................ 15
Earning Assets ..................................................................................................... 18
Funding Sources .................................................................................................... 22
Capital Resources .................................................................................................. 22
Critical Accounting Policies ....................................................................................... 23
Item 3. Quantitative and Qualitative Disclosure About Market Risk ................................................. 23
Item 4. Controls and Procedures ................................................................................... 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................................... 25
Item 2. Changes in Securities ..................................................................................... 25
Item 3. Defaults Upon Senior Securities ........................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ....................................................... 25
Item 5. Other Information ......................................................................................... 25
Item 6. Exhibits and Reports on Form 8-K .......................................................................... 25
SIGNATURES AND CERTIFICATIONS
2
PART I
FINANCIAL INFORMATION
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, December 31,
ASSETS 2002 2001
------------- ------------
(Unaudited)
Cash and cash equivalents: (thousands)
Cash and due from banks $ 19,468 $ 17,993
Federal funds sold 2,125 2,100
Interest-bearing deposits in other banks 373 584
--------- ---------
Total cash and cash equivalents 21,966 20,677
Investment securities available for sale 52,280 33,003
Investment securities held to maturity 1,129 4,060
Loans:
Commercial, financial and agricultural 333,556 280,453
Real estate - mortgage 149,371 147,973
Real estate - construction 51,434 41,064
Installment and consumer 39,406 42,157
--------- ---------
Total loans, net of unearned income 573,767 511,647
Less: Allowance for loan losses (6,045) (5,205)
--------- ---------
Net loans 567,722 506,442
Loans held for sale 6,423 9,908
Premises and equipment, net 25,254 26,167
Intangible assets, net 6,241 6,802
Other assets 5,845 4,962
--------- ---------
TOTAL ASSETS $ 686,860 $ 612,021
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 80,572 $ 72,859
Savings, NOW and money market 221,224 191,495
Time under $100,000 163,187 152,986
Time $100,000 and over 148,047 115,551
--------- ---------
Total deposits 613,030 532,891
Securities sold under repurchase agreements and federal funds purchased 9,014 18,148
Other borrowings 10,000 10,000
Other liabilities 5,229 4,313
--------- ---------
Total liabilities 637,273 565,352
--------- ---------
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,
6,106,703 shares issued and outstanding at September 30, 2002 and
6,106,453 shares issued and outstanding at December 31, 2001 61 61
Additional paid-in capital 30,644 30,533
Retained earnings 18,638 15,749
Accumulated other comprehensive income, net of taxes 244 326
--------- ---------
Total shareholders' equity 49,587 46,669
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 686,860 $ 612,021
========= =========
See accompanying notes to unaudited consolidated financial statements
3
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
September 30,
2002 2001
---- ----
(thousands)
Interest Income
Interest and fees on loans $ 10,119 $ 9,902
Interest on investment securities available for sale 552 460
Interest on investment securities held to maturity 24 90
Interest on federal funds sold 11 66
Interest on interest-bearing deposits 10 6
---------- ----------
Total interest income 10,716 10,524
Interest Expense
Interest on deposits 3,733 4,795
Interest on repurchases and federal funds purchased 50 121
Interest on other borrowings 165 276
---------- ----------
Total interest expense 3,948 5,192
---------- ----------
Net interest income 6,768 5,332
Provision for Loan Losses 600 550
---------- ----------
Net interest income after provision for loan losses 6,168 4,782
Non-Interest Income
Service charges 823 743
Secondary market mortgage sales 568 491
Other fees and charges 161 138
---------- ----------
Total non-interest income 1,552 1,372
Non-Interest Expense
Salaries and employee benefits 2,828 2,530
Occupancy and equipment expenses 882 825
Other operating expenses 1,645 1,842
---------- ----------
Total non-interest expense 5,355 5,197
---------- ----------
Income before income taxes 2,365 957
Provision for income taxes 888 333
---------- ----------
NET INCOME $ 1,477 $ 624
========== ==========
Earnings Per Share (Note 3):
Basic earnings per share $ 0.24 $ 0.10
========== ==========
Weighted average shares outstanding 6,104,021 6,097,248
========== ==========
Diluted earnings per share $ 0.24 $ 0.10
========== ==========
Diluted weighted average shares outstanding 6,213,422 6,210,072
========== ==========
Dividends Per Share $ 0.05 $ 0.05
========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Nine Months Ended
September 30,
2002 2001
-------------- ---------------
(thousands)
Interest Income
Interest and fees on loans $ 29,019 $ 28,349
Interest on investment securities available for sale 1,399 1,439
Interest on investment securities held to maturity 95 305
Interest on federal funds sold 54 94
Interest on interest-bearing deposits 15 8
---------- ----------
Total interest income 30,582 30,195
Interest Expense
Interest on deposits 10,910 13,438
Interest on repurchases and federal funds purchased 158 480
Interest on other borrowings 489 1,142
---------- ----------
Total interest expense 11,557 15,060
---------- ----------
Net interest income 19,025 15,135
Provision for Loan Losses 1,625 1,450
---------- ----------
Net interest income after provision for loan losses 17,400 13,685
Non-Interest Income
Service charges 2,385 2,138
Secondary market mortgage sales 1,562 1,237
Other fees and charges 509 453
---------- ----------
Total non-interest income 4,456 3,828
Non-Interest Expense
Salaries and employee benefits 8,354 7,507
Occupancy and equipment expenses 2,538 2,221
Other operating expenses 4,926 4,590
---------- ----------
Total non-interest expense 15,818 14,318
---------- ----------
Income before income taxes 6,038 3,195
Provision for income taxes 2,233 1,118
---------- ----------
NET INCOME $ 3,805 $ 2,077
========== ==========
Earnings Per Share (Note 3):
Basic earnings per share $ 0.62 $ 0.34
========== ==========
Weighted average shares outstanding 6,100,368 6,096,582
========== ==========
Diluted earnings per share $ 0.61 $ 0.33
========== ==========
Diluted weighted average shares outstanding 6,189,081 6,212,878
========== ==========
Dividends Per Share $ 0.15 $ 0.15
========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001
--------- ---------
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,805 $ 2,077
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 1,864 1,408
Provision for loan loss 1,625 1,450
Investment securities amortization (accretion), net 150 (5)
Non-cash compensation - 17
Net proceeds from (origination of) loans held for sale 3,485 (9,613)
Changes in assets and liabilities:
Other assets (1,407) (664)
Other liabilities 915 910
--------- ---------
Net cash provided by (used in) operating activities 10,437 (4,420)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale (32,483) (30,876)
Proceeds from maturities of securities available for sale 5,466 21,798
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 2,930 1,998
Net increase in loans (62,905) (106,486)
Purchases of premises and equipment (390) (3,065)
Branches acquired from Republic Bank - 42,279
--------- ---------
Net cash used in investing activities (79,242) (64,349)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 80,139 92,702
Net decrease in securities sold under repurchase agreements
and federal funds purchased (9,134) (5,385)
Net decrease in FHLB advances - (18,000)
Cash dividends (915) (915)
Repurchase of common stock (100) (152)
Proceeds from exercise of stock options 104 10
--------- ---------
Net cash provided by financing activities 70,094 68,260
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,289 (509)
CASH AND CASH EQUIVALENTS, beginning of period 20,677 20,898
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 21,966 $ 20,389
========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 12,590 $ 14,041
========= =========
Income taxes paid $ 2,266 $ 1,479
========= =========
See accompanying notes to unaudited consolidated financial statements.
6
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 financial position,
results of operations and cash flows for the interim periods presented.
Operating results for the nine months ended September 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")
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 the Company and
its wholly owned subsidiary, CNB National Bank. All significant intercompany
accounts and transactions have been eliminated.
Note 3. Earnings Per Share
Basic earnings per 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
September 30, 2002 and 2001.
The following table sets forth the computation of earnings per share for the
each of the three and nine month periods ended September 30, 2002 and 2001.
7
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $ 1,477 $ 624 $ 3,805 $ 2,077
Preferred stock dividends - - - -
---------- ---------- ---------- ----------
Numerator for basic earnings per share
Income to common shareholders 1,477 624 3,805 2,077
---------- ---------- ---------- ----------
Effect of dilutive securities:
Preferred stock dividends - - - -
---------- ---------- ---------- ----------
Numerator for diluted earnings per share
Income available to common shareholders $ 1,477 $ 624 $ 3,805 $ 2,077
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
Weighted-average shares 6,104,021 6,097,248 6,100,368 6,096,582
Effect of dilutive securities:
Common stock options 109,401 112,824 88,713 116,296
---------- ---------- ---------- ----------
Dilutive potential common shares 109,401 112,824 88,713 116,296
---------- ---------- ---------- ----------
Denominator for diluted earnings per share
Adjusted weighted average shares 6,213,422 6,210,072 6,189,081 6,212,878
========== ========== ========== ==========
Basic earnings per share $ 0.24 $ 0.10 $ 0.62 $ 0.34
========== ========== ========== ==========
Diluted earnings per share $ 0.24 $ 0.10 $ 0.61 $ 0.33
========== ========== ========== ==========
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 nine months ended September 30, 2002 and 2001.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Unrealized gain (loss) recognized in other
comprehensive income (net):
Available for sale securities $ 385 $ 241 $ 545 $ 908
Interest rate swap designated as cash flow hedge (450) - (676) -
------- ------- ------- -------
Total unrealized gains (loss) before income taxes (65) 241 (131) 908
Income taxes (24) 90 (49) 339
------- ------- ------- -------
Net of tax $ (41) $ 151 $ (82) $ 569
======= ======= ======= =======
Amounts reported in net income:
Gain on called securities $ 4 $ - $ 4 $ -
Interest rate swap designated as cash flow hedge (74) - (214) -
Net amortization (accretion) 59 - 150 (5)
------- ------- ------- -------
Reclassification adjustment (11) - (60) (5)
Income taxes 4 - 22 2
------- ------- ------- -------
Reclassification adjustment, net of tax $ (7) $ - $ (38) $ (3)
======= ======= ======= =======
Amounts reported in other comprehensive income:
Net unrealized gain (loss) arising during period, net of tax $ (48) $ 151 $ (120) $ 566
Reclassification adjustment, net of tax 7 - 38 3
------- ------- ------- -------
Unrealized gain (loss) arising during period, net of tax (41) 151 (82) 569
Net income 1,477 624 3,805 2,077
------- ------- ------- -------
Total comprehensive income $ 1,436 $ 775 $ 3,723 $ 2,646
======= ======= ======= =======
8
Note 5. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("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 nine months ended September 30, 2002. The Company recorded
goodwill amortization expense of $52,000 for the nine months ended September 30,
2001. The carrying value of goodwill was $646,000 at September 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
$561,000 for the three and nine months ended September 30, 2002 and $181,000 and
$287,000 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 $2.0 million at September 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 SFAS 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. Although earlier application is
encouraged, SFAS 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company believes the adoption of SFAS
143 will not have a significant impact on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 supersedes SFAS 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 Accounting
Principles Board 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. SFAS 144 also amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. The adoption of SFAS 144 did not
have a significant impact on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of SFAS 13, and Technical Corrections as of May 2002 ("SFAS
145"). SFAS 145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment
of Debt, and an amendment of that Statement, SFAS 64, Extinguishments of Debt
Made to Satisfy Sinking-Funds Requirements. SFAS 145 also rescinds SFAS 44,
Accounting for Intangible Assets of Motor Carriers and amends SFAS 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. SFAS 145 is generally effective for financial
9
statements issued for fiscal years beginning after May 15, 2002. The Company
believes the adoption of SFAS 145 will not have a significant impact on the
Company's consolidated financial statements.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for 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 provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes the adoption of SFAS 146 will not have a
significant impact on the Company's consolidated financial statements.
In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9 ("SFAS 147"). SFAS 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. SFAS 147 also amends FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. The provisions of SFAS 147 relating to the acquisitions of
certain financial institutions, is effective for acquisitions for which the date
of the acquisition is on or after October 1, 2002. The provisions of SFAS 147
relating to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
are effective on October 1, 2002, with earlier application permitted. The
Company believes the adoption of SFAS 147 will not have a significant impact on
the Company's consolidated financial statements.
10
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
Selected Financial Data
Nine Months Ended
September 30,
2002 2001
------------ ------------
Dollars in thousands except per share information.
====================================================================================================================================
SUMMARY OF OPERATIONS:
Total interest income $ 30,582 $ 30,195
Total interest expense (11,557) (15,060)
----------- -----------
Net interest income 19,025 15,135
Provision for loan losses (1,625) (1,450)
----------- -----------
Net interest income after provision for loan losses 17,400 13,685
Non-interest income 4,456 3,828
Non-interest expense (15,818) (14,318)
----------- -----------
Income before taxes 6,038 3,195
Income taxes (2,233) (1,118)
----------- -----------
Net income $ 3,805 $ 2,077
=========== ===========
====================================================================================================================================
PER COMMON SHARE:
Basic earnings $ 0.62 $ 0.34
Diluted earnings 0.61 0.33
Book value 8.12 7.60
Dividends 0.15 0.15
Actual shares outstanding 6,106,703 6,085,077
Weighted average shares outstanding 6,100,368 6,096,582
Diluted weighted average shares outstanding 6,189,081 6,212,878
====================================================================================================================================
KEY RATIOS:
Return on average assets 0.79% 0.52%
Return on average shareholders' equity 10.54 6.10
Dividend payout 24.19 44.11
Efficiency ratio 67.37 75.50
Total risk-based capital ratio 8.69 8.94
Average shareholders' equity to average assets 7.49 8.47
Tier 1 leverage 6.42 6.66
====================================================================================================================================
FINANCIAL CONDITION AT PERIOD-END:
Assets $ 686,860 $ 601,792
Loans 573,767 498,311
Deposits 613,030 522,754
Shareholders' equity 49,587 46,242
====================================================================================================================================
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following analysis reviews important factors affecting the financial
condition and results of operations of CNB Florida Bancshares, Inc. (the
"Company") for the three and nine month periods ended September 30, 2002 and
2001. This financial information should be read in conjunction with the
unaudited consolidated financial statements of the Company and its wholly owned
subsidiary, CNB National Bank ("the Bank"), included in Item 1. of this Form
10-Q 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 September 30, 2002
were $1.5 million, or $0.24 per diluted share, compared to $624,000, or $0.10
per diluted share, in the third quarter of 2001. For the nine months ended
September 30, 2002, net income was $3.8 million or $0.61 per diluted share,
compared to $2.1 million, or $0.33 per diluted share for the comparable 2001
period. Total assets increased to $686.9 million at September 30, 2002 compared
to $601.8 million at September 30, 2001, an increase of 14%. Total outstanding
loans and deposits rose 15% and 17% to $573.8 million and $613.0 million,
respectively, at September 30, 2002 from $498.3 million and $522.8 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 was $19.0 million for the nine
month period ended September 30, 2002, compared to $15.1 million for the
comparable period in 2001, an increase of 26%. The increase was primarily due to
loan and securities growth, improved rates and spreads and higher transaction
account deposit balances. These increases were partially offset by growth in
time deposits.
Total average earning assets increased $107.0 million, or 22% to $590.5
million in 2002, compared to $483.4 million in 2001. The primary driver of this
increase was an increase in the average balance of loans of $99.5 million.
Increases in time, money market and other interest bearing deposits, including
those accounts acquired from Republic Bank in May 2001, were the main
contributors in the $88.1 million, or 21%, growth in average interest bearing
liabilities.
Net interest margin increased to 4.31% for the nine months ended September
30, 2002 compared to 4.19% for the same period in 2001. The increase is due to
loan growth and improved spreads on loans and time deposits. These improvements
were partially offset by lower spreads on transaction account deposit balances.
Total earning asset yields decreased to 6.92% in 2002 from 8.35% in 2001 and
rates on interest-bearing liabilities decreased to 3.01% in 2002 from 4.74% 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 and a stagnant interest rate
environment during 2002. The lower rates on interest bearing liabilities reflect
a change in funding mix away from higher-cost sources to lower cost deposits,
coupled with the lower interest rate environment. During the first nine months
of 2002, the Company benefited from a reduction in funding costs as higher-rate
certificates of deposit matured and rolled over at lower rates.
12
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 and Rates" provides the
Company's average volume of interest earning assets and interest bearing
liabilities for the nine months ended September 30, 2002 and 2001.
Table 1: Average Balances - Yields and Rates
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2002 September 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 $ 4,337 $ 54 1.66% $ 3,178 $ 94 3.96%
Investment securities
available for sale 42,500 1,399 4.40 32,248 1,439 5.97
Investment securities
held to maturity 2,113 95 6.01 6,659 305 6.12
Loans (1) 540,500 29,019 7.18 441,001 28,349 8.59
Interest bearing deposits 1,021 15 1.96 346 8 3.09
-------- -------- ---- -------- -------- ----
TOTAL EARNING ASSETS 590,471 30,582 6.92 483,432 30,195 8.35
All other assets 54,372 54,284
-------- --------
TOTAL ASSETS $644,843 $537,716
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW and money markets $186,829 $ 2,504 1.79% $140,193 $ 3,018 2.88%
Savings 21,795 122 0.75 18,218 158 1.16
Time deposits 280,672 8,284 3.95 224,638 10,262 6.11
Repurchases and federal
funds purchased 13,964 158 1.51 14,725 480 4.36
Short term borrowings - - - 27,344 1,142 5.58
Other borrowings 10,000 489 6.54 - - -
-------- -------- ---- -------- -------- ----
TOTAL INTEREST BEARING
LIABILITIES 513,260 11,557 3.01 425,118 15,060 4.74
Demand deposits 78,181 60,654
Other liabilities 5,117 6,400
Shareholders' equity 48,285 45,544
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $644,843 $537,716
======== ========
---- -----
INTEREST SPREAD (2) 3.91% 3.61%
==== ====
-------- --------
NET INTEREST INCOME $ 19,025 $ 15,135
======== ========
NET INTEREST MARGIN (3) 4.31% 4.19%
==== ====
- ----------
(1) Interest income on average loans includes loan fee recognition of $380,000
and $804,000 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.
13
Table 1a: Analysis of Changes in Interest Income and Expense
(Unaudited)
NET CHANGE SEPTEMBER 30, NET CHANGE SEPTEMBER 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 $ 34 $ (74) $ (40) $ (35) $ (48) $ (83)
Investment securities available for sale 457 (497) (40) (62) (92) (154)
Investment securities held to maturity (208) (2) (210) (155) 16 (139)
Loans 6,378 (5,708) 670 9,377 (1,638) 7,739
Interest bearing deposits 16 (9) 7 (40) (9) (49)
------- ------- ------- ------- ------- -------
Total 6,677 (6,290) 387 9,085 (1,771) 7,314
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW and money markets 1,004 (1,518) (514) 781 (461) 320
Savings 31 (67) (36) 8 (30) (22)
Time deposits 2,560 (4,538) (1,978) 3,363 605 3,968
Repurchases and federal funds
purchased (9) (313) (322) 192 (90) 102
Short term borrowings - - - 811 (237) 574
Other borrowings (726) 73 (653) - -
------- ------- ------- ------- ------- -------
Total 2,860 (6,363) (3,503) 5,155 (213) 4,942
------- ------- ------- ------- ------- -------
Net interest income $ 3,817 $ 73 $ 3,890 $ 3,930 $(1,558) $ 2,372
======= ======= ======= ======= ======= =======
- ----------
(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 nine months ended September 30, 2002
increased $180,000, or 13%, and $628,000, or 16%, respectively, from the
comparable periods in 2001. The increases in both the three and nine month
periods were primarily attributed to fees associated with the increased deposit
base and secondary market mortgage loan sales. 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 $247,000, or 12%, for the nine months ended September 30, 2002
compared to the same period in 2001. Secondary market mortgage loan sales
increased $325,000, or 26%, for the nine months ended September 30, 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 $56,000,
or 12%, for the nine month period ended September 30, 2002 compared to the
comparable 2001 period.
Non-interest income, annualized, as a percentage of average assets was
0.92% for the nine months ended September 30, 2002, compared to 0.95% for the
comparable period in 2001.
Non-Interest Expense
Non-interest expense was $5.4 million and $15.8 million for the three and
nine month periods ended September 30, 2002 compared to $5.2 million and $14.3
million for the respective 2001 periods, an increase of 3% and 10%,
respectively. This increase is primarily attributable to higher personnel costs
resulting from investments in the Company's production and operational platform
14
during the last three years. Annualized, non-interest expense as a percentage of
average assets was 3.28% for the nine month period ended September 30, 2002,
compared to 3.56% 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 $847,000 or 11% to $8.4
million for the 2002 nine month period, compared to $7.5 million for the same
period in 2001. As a percentage of average assets annualized, salaries and
employee benefits decreased to 1.73% from 1.87%, for the nine month period ended
September 30, 2002 and 2001, respectively. Average full-time equivalent
employees increased by eight to 257 from September 30, 2001 to September 30,
2002.
Occupancy expense (including premises, furniture, fixtures and equipment)
increased in the three and nine month periods of 2002 by $57,000, or 7%, and
$317,000, or 14%, 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.
Other operating expenses increased $336,000, or 7%, in the 2002 nine month
period compared to the same period in 2001. The following table details the
areas of significance in other operating expenses.
Table 2: Other Operating Expenses
Nine Months Ended September 30,
2002 2001
---- ----
(thousands)
Data processing $ 990 $ 810
Telephone 572 430
Amortization of intangible assets 561 339
Legal and professional 544 324
Postage and delivery 532 495
Advertising and promotion 361 437
Supplies 320 427
Regulatory fees 177 167
Loan expenses 130 191
Administrative 124 155
Education expense 96 78
Other general operating 79 50
Dues and subscriptions 70 66
Directors fees 65 56
Insurance and bonding 56 80
Other 249 485
------ ------
Total other operating expenses $4,926 $4,590
====== ======
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 $65.1
million and represented 11% of average total deposits during the nine months of
2002, compared to $55.1 million and 12% for 2001. Average loans were 95% and 99%
15
of average deposits for the nine month period ended September 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 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 has a $3 million line of credit with one of its correspondent banks.
The line of credit matures on June 30, 2003 with interest floating quarterly at
3-month Libor plus 145 basis points. There are no amounts outstanding on the $3
million line of credit. The line of credit and the Company's $10 million term
loan are 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 September 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 3.12% 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 3.56% 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 1.69% and (0.22)%,
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 September 30, 2002, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances.
16
Table 3: Rate Sensitivity Analysis
September 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 $ 90,935 $ 49,958 $ 40,382 $ 34,543 $ 46,513 $ 89,850 $352,181 $368,394
Average interest rate 7.34% 7.60% 7.86% 7.78% 7.43% 7.24% 7.47%
Variable rate loans 65,897 25,467 20,867 15,697 10,257 83,401 221,586 234,340
Average interest rate 5.47% 5.61% 5.67% 5.91% 6.90% 7.60% 6.40%
Investment securities (1)
Fixed rate investments 8,119 11,496 5,472 16,129 - 7,617 48,833 49,881
Average interest rate 2.39% 5.79% 4.38% 4.42% 4.77% 4.46%
Variable rate investments - - - - - 524 524 531
Average interest rate 4.17% 4.17%
Federal funds sold 2,125 - - - - - 2,125 2,125
Average interest rate 1.77% 1.77%
Other earning assets (2) 3,370 - - - - - 3,370 3,370
Average interest rate 5.06% 5.06%
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets $170,446 $ 86,921 66,721 $ 66,369 $ 56,770 $181,392 $628,619 $658,641
Average interest rate 6.27% 6.78% 6.89% 6.52% 7.33% 7.29% 6.82%
======== ======== ======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
NOW $ 64,188 $ - $ - $ - $ - $ 52,196 $ 116,384 $116,384
Average interest rate 2.13% 0.50% 1.40%
Money market 78,312 - - - - 4,468 82,780 82,780
Average interest rate 2.51% 1.57% 2.46%
Savings - - - - - 22,060 22,060 22,060
Average interest rate 0.75% 0.75%
CD's under $100,000 112,004 21,101 22,771 6,919 392 - 163,187 165,164
Average interest rate 3.09% 4.00% 4.14% 4.63% 4.99% 3.42%
CD's $100,000 and over 115,518 15,438 11,953 3,636 1,502 - 148,047 150,282
Average interest rate 3.69% 4.22% 4.39% 4.95% 5.37% 3.85%
Securities sold under
repurchase agreements and
federal funds purchased 9,014 - - - - - 9,014 9,014
Average interest rate 1.45% 1.45%
Other borrowings (3) - - - - 10,000 - 10,000 10,000
Average interest rate 3.56% 3.56%
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $379,036 $ 36,539 $ 34,724 $ 10,555 $ 11,894 $ 78,724 $551,472 $555,684
Average interest rate 2.95% 4.09% 4.23% 4.74% 3.84% 0.63% 2.83%
======== ======== ======== ======== ======== ======== ======== ========
- ----------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net unrealized gains of $1,055,000.
(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. At September 30, 2002 the fair market value
of the interest rate swap was approximately ($667,000).
17
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, were 76% of total deposits at September 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
September 30, 2002
(dollars in thousands)
Amount
------
Three months or less $ 37,840
Three through six months 27,313
Six through twelve months 50,365
Over twelve months 32,529
--------
Total $148,047
========
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 nine month period ended September 30, 2002, average
loans were $540.5 million and were 95% of average deposits, compared to $441.0
million and 99% for the same period in 2001. The following table reflects the
composition of the Company's loan portfolio as of September 30, 2002 compared to
December 31, 2001.
Table 5: Loan Portfolio Composition
September 30, December 31,
2002 2001
------------- ------------
(thousands)
Commercial, financial and agricultural $ 333,556 $ 280,453
Real estate - mortgage 149,371 147,973
Real estate - construction 51,434 41,064
Installment and consumer 39,406 42,157
--------- ---------
Total loans, net of unearned income 573,767 511,647
Less: allowance for loan losses (6,045) (5,205)
--------- ---------
Net loans $ 567,722 $ 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 and also has concentrations in the types of
loans funded. The Bank's four largest concentration categories are: Land
Subdivision and Land Development, Lessors of Nonresidential Buildings, Office of
Physicians and Commercial Building Construction.
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.
18
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 September 30, 2002, was 1.05% of total
loans, compared to 1.02% at December 31, 2001 and 0.97% at September 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
September 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 $4,514 58.1% $3,669 53.8%
Real estate - mortgage 534 26.0% 484 30.3%
Real estate - construction 28 9.0% 25 7.9%
Consumer 956 6.9% 932 8.0%
Unallocated 13 - 95 -
------ ----- ------ -----
Total $6,045 100.0% $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 70% from December 31, 2001 to $4.9 million at
September 30, 2002. Non-performing assets as a percentage of total assets
increased to 0.71% on September 30, 2002 from 0.47% on December 31, 2001. The
increase in non-performing assets is primarily due to four individual loan
relationships consisting of commercial, commercial real estate and mortgage
loans. The remaining increase is attributed to a greater number of delinquent
smaller-balance consumer loans.
Table 7: Non-Performing Assets
September 30, December 31,
2002 2001
------------- ------------
(dollars in thousands)
Non-accrual loans $3,257 $1,377
Past due loans 90 days or
more and still accruing 1,601 1,271
Other real estate owned
and repossessions 31 229
------ ------
Total non-performing assets $4,889 $2,877
====== ======
Percent of total assets 0.71% 0.47%
19
Table 8: Activity in Allowance for Loan Losses
September 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 578 272
Real estate - mortgage 68 46
Real estate - construction - -
Consumer 314 288
---------- ----------
Total loans charged-off (960) (606)
Recoveries on loans previously charged-off:
Commercial, financial and agricultural 62 107
Real estate - mortgage 33 21
Real estate - construction - -
Consumer 80 98
---------- ----------
Total loan recoveries 175 226
---------- ----------
Net loans charged-off (785) (380)
---------- ----------
Provision for loan losses charged to expense 1,625 1,450
---------- ----------
Ending balance $ 6,045 $ 4,850
========== ==========
Total loans outstanding $ 573,767 $ 498,311
Average loans outstanding $ 540,500 $ 441,001
Allowance for loan losses to loans outstanding 1.05% 0.97%
Net charge-offs to average loans outstanding, annualized 0.19% 0.12%
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 $53.4 million at September 30, 2002, an increase of 44% 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 98% of the total investment
portfolio at September 30, 2002 had a value of $52.3 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 September 30, 2002,
shareholders' equity included a net unrealized gain of $662,000, 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 Federal Home Loan Bank also require equity
investments to be maintained by the Company.
20
The following tables set forth the maturity distribution and the weighted
average yields of the Company's investment portfolio.
Table 9: Maturity Distribution of Investment Securities (1)
September 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 $ - $ - $ 4,034 $ 4,044
------- ------- ------- -------
Total U.S. Treasury - - 4,034 4,044
U.S. Government Agencies
and Corporations:
One year or less - - 4,084 4,117
Over one through five years 1,129 1,129 31,969 32,883
------- ------- ------- -------
Total U.S. Government Agencies 1,129 1,129 36,053 37,000
and Corporations
Obligations of State and Political
Subdivisions:
Over ten years - - 609 640
------- ------- ------- -------
Total Obligations of State and - - 609 640
Political Subdivisions
Mortgage-Backed Securities (2):
Over one through five years - - 33 33
Over five through ten years - - 4,078 4,116
Over ten years - - 3,421 3,450
------- ------- ------- -------
Total Mortgage-Backed Securities - - 7,532 7,599
Other Securities:
Over ten years (3) - - 2,997 2,997
------- ------- ------- -------
Total Other Securities - - 2,997 2,997
------- ------- ------- -------
Total Securities $ 1,129 $ 1,129 $51,225 $52,280
======= ======= ======= =======
- ----------
(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
September 30, 2002 December 31, 2001 September 30, 2001
------------------ ----------------- ------------------
One Year or Less 2.44% 2.56% 2.56%
More than One through Five Years 5.23% 5.72% 5.39%
More than Five through Ten Years 4.99% 4.95% 6.06%
More than Ten Years (1) 4.58% 4.96% 6.34%
- ----------
(1) Represents adjustable rate mortgage-backed securities which are repriceable
within one year.
21
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 September 30, 2002 and December 31, 2001.
Table 11: Total Deposits
September 30, December 31,
2002 2001
------------- ------------
(thousands)
Non-interest bearing:
Demand checking $ 80,572 $ 72,859
Interest bearing:
NOW checking 116,384 105,157
Money market checking 82,780 66,088
Savings 22,060 20,250
Certificates of deposit 311,234 268,537
-------- --------
Total deposits $613,030 $532,891
======== ========
CAPITAL RESOURCES
Shareholders' equity at September 30, 2002 was $49.6 million, as compared
to $46.7 million at December 31, 2001. During each of the first, second and
third quarters of 2002, the Board of Directors declared quarterly dividends of
$0.05 per share, consistent with 2001. At September 30, 2002, the Company's
common stock had a book value of $8.12 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 September 30, 2002, the Bank was considered
"well capitalized."
22
At September 30, 2002 and 2001, the Company's Tier 1 capital, Total
risk-based capital and Tier 1 leverage ratios were are as follows:
Table 12: Capital Ratios
Adequately-
September 30, Well-Capitalized Capitalized
2002 2001 Requirements Requirements
---- ---- ------------ ------------
Risk Based Capital Ratios:
Tier 1 Capital Ratio 7.6% 8.0% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 8.7% 8.9% 10.0% 8.0%
Tier 1 Leverage Ratio 6.4% 6.7% 5.0% 4.0%
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the
portrayal of the Company's financial condition and requires management's most
difficult, subjective or complex judgments. The circumstances that make these
judgments difficult, subjective or complex have to do with the need to make
estimates about the effect of matters that are inherently uncertain. The
Company's considers the establishment and maintenance of the allowance for loan
loss and the accounting for its core deposit intangible asset to be critical
accounting policies.
The allowance for loan loss is established through a provision for loan
loss charged to expense. Loans are charged against the allowance for loan loss
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
inherent losses on existing loans that may become uncollectible based on
evaluations of the collectibility of the loans. The evaluations take into
consideration such objective factors as changes in the nature and volume of the
loan portfolio, 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
benefit to the Company of the depositor relationships acquired. To the extent
that the deposit relationships acquired diminish faster than anticipated, the
amount of the core deposit intangible that is amortized each period could
increase significantly, thus shortening its useful life. Through September 30,
2002, the performance of the depositor relationships did not differ materially
from expectations.
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 September 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
23
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 September
30, 2002, including interest accruals, was approximately ($667,000). 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
September 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 September 30, 2002 would not
necessarily be considered to apply at subsequent dates.
CONTROLS AND PROCEDURES
Within ninety days prior to the filing of this Report on Form 10-Q, the
Company, under the supervision and with the participation of its management,
including its Chief Executive Officer and Chief Financial Officer, performed an
evaluation of the Company's disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that such disclosure controls and procedures are effective to ensure that
material information relating to the Company is made known to them, particularly
during the period in which this Report is being prepared.
24
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 - Not
applicable.
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 July 25, 2002, the Company filed a Form 8-K to report its 2002
second quarter earnings.
25
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: November 13, 2002
26
CERTIFICATIONS
I, K. C. Trowell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Florida
Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ K. C. Trowell
------------------------------------
K. C. Trowell
Chairman of the Board, President and
Chief Executive Officer
27
I, G. Thomas Frankland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Florida
Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ G. Thomas Frankland
----------------------------
G. Thomas Frankland
Executive Vice President and
Chief Financial Officer
28