UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 31, 2002
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No: 0-25988
CNB Florida Bancshares, Inc.
----------------------------
(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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
Par value $ 0.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No X
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $43,675,685.30 (based on the closing price of the Registrant's
common stock as quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") on June 28, 2002 of $11.35 per share).
The number of shares of the Registrant's common stock outstanding as of March 7,
2003 was 6,125,500 shares, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's 2003 Annual Meeting Proxy Statement is incorporated by
reference in this report in Part III, pursuant to Instruction G of Form 10-K,
except for the information relating to executive officers and key employees. The
Company will file its definitive Proxy Statement with the Commission prior to
April 30, 2003.
CNB FLORIDA BANCSHARES, INC.
FINANCIAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business .....................................................................................3
Supervision and Regulation ...................................................................8
Item 2. Properties ..................................................................................11
Item 3. Legal Proceedings ...........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders .........................................12
Executive Officers and Key Employees of the Registrant ......................................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..........................14
Item 6. Selected Financial Data ........................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..........16
Overview .......................................................................................16
Results of Operations ..........................................................................17
Income Taxes ...................................................................................21
Liquidity and Interest Rate Sensitivity.........................................................21
Earning Assets..................................................................................25
Loan Quality ...................................................................................26
Investment Portfolio ...........................................................................28
Capital Resources ..............................................................................30
Quarterly Financial Information ................................................................31
Item 7a. Qualitative and Quantitative Disclosure About Market Risk ......................................34
Critical Accounting Policies ...................................................................34
Item 8. Consolidated Financial Statements ..............................................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........71
PART III
Item 10. Directors and Executive Officers of the Registrant ...........................................71
Item 11. Executive Compensation .......................................................................71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ......................................................................................71
Item 13. Certain Relationships and Related Transactions ...............................................71
Item 14. Controls and Procedures ......................................................................72
PART IV
Item 15. Exhibits and Reports on Form 8-K .............................................................72
SIGNATURES AND CERTIFICATIONS
2
PART I
BUSINESS
This Annual Report on Form 10-K contains forward-looking statements, which
involve risks and uncertainties which are described in this Annual Report and in
other filings with the Securities and Exchange Commission (the "SEC"). The
Company makes this Form 10-K available on its web site at www.cnbnb.com. The
-------------
actual results of CNB Florida Bancshares, Inc. (the "Company" or "CNB") may
differ significantly from the results discussed in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, increased competitive pressures among depository and other financial
institutions, changes in the interest rate environment that may reduce margins,
general economic or business conditions in the Company's markets that lead to a
deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with Selected
Historical Financial Information and the Consolidated Financial Statements of
the Company, which are included in this Form 10-K.
GENERAL
The Company is a one-bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), which commenced operations in
1987 by acquiring the capital stock of CNB National Bank (the "Bank"), which was
formed in 1986. The Company relocated its headquarters from Lake City, Florida
to Jacksonville, Florida during 2000 in connection with its expansion plans
described below. The Bank is a national banking association subject to the
supervision of the Office of the Comptroller of the Currency ("Comptroller"). It
provides traditional deposit, lending and mortgage products and services to its
commercial and retail customers through fourteen full service branches located
within the following contiguous counties in Northeast Florida: Alachua, Baker,
Bradford, Columbia, Duval, St. Johns, Suwannee and Union County. At December 31,
2002, the Company had total assets of $730.7 million, total gross loans of
$605.8 million, total deposits of $648.6 million, and total shareholders' equity
of $50.9 million. Net income for the years ended December 31, 2002, 2001 and
2000 was $5.4 million, $2.9 million and $2.5 million, respectively. For
additional financial information related to the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements" in Part II of this Form 10-K.
EVOLUTION OF THE FLORIDA BANKING MARKET
Significant changes in interstate banking and branching laws, enacted
during the early 1980s, have allowed bank holding companies to aggressively
expand into new markets that have attractive growth rates and demographics. As a
result, substantial consolidation of the Florida banking market has occurred.
Management believes Florida has been particularly attractive to regional bank
holding companies because it is the fourth largest state in the country in terms
of total population and is among the ten fastest growing states in the country.
As more out-of-state bank holding companies enter the Florida market, the
Company believes that the number of depository institutions headquartered and
operating in Florida will continue to decline.
The Company has observed a similar consolidation trend in the markets in
and around Gainesville and Jacksonville (the "Expansion Markets"). Historically
the Company competed successfully in Columbia, Suwannee, Baker, Bradford and
Union Counties (the "Core Markets"), against larger bank holding companies for
middle market customers. In the Company's Expansion Markets, many of such
customers have preferred the banking services and products of banks that are
locally headquartered. Increasingly, however, large regional bank holding
companies have entered the Company's Expansion Markets by acquiring such
previously locally headquartered banks. For example, in January 1998, Bank of
3
America Corporation formerly known as NationsBank Corporation completed its
acquisition of Jacksonville-based Barnett Banks, Inc. ("Barnett"), which prior
to its acquisition was the largest bank headquartered in Florida. The
acquisition of Barnett closely followed the acquisition of three of
Jacksonville's community banks by SouthTrust Bank Corporation ("SouthTrust") and
Compass Bancshares, Inc. ("Compass") in 1996 and 1997. Similarly, Gainesville
State Bank, the largest community bank in Gainesville and Alachua County (the
"Gainesville Market"), was acquired by Compass in 1997. Consolidation continued
into 2002 and 2003 as both BB&T of Winston-Salem, North Carolina and Alabama
National BanCorporation of Birmingham, Alabama entered the First Coast and
Gainesville markets by acquiring Florida-based community banks. As a result, the
Company now competes in its Core Markets, and will compete in its Expansion
Markets, primarily with SunTrust Banks, Bank of America, Wachovia, SouthTrust,
AmSouth and Compass, all of which are headquartered outside of Florida.
GROWTH OPPORTUNITY FOR THE COMPANY
Management believes that a significant segment of the historical customer
base of Barnett and the customer bases of other acquired community banks in
Northeast Florida, particularly individuals and small and medium-sized
businesses, prefer the personalized service that characterized their
relationships with the locally headquartered banks that were acquired. Many of
these personal relationships have been disrupted as the larger, regional
financial institutions increasingly focus on larger corporate customers, offer
primarily standardized loan and deposit products and services, and employ
centralized management and more remote decision-making. Thus, Company management
believes there exists a unique opportunity to address the under-served banking
needs of individuals and small and medium-sized businesses in its Expansion
Markets, which are contiguous and demographically similar to the Company's
existing Core Markets. Accordingly, the Company's current strategic focus is to
capitalize on this market opportunity. In pursuing this opportunity, the Company
will continue to focus on that specific segment of the market to which it has
historically appealed. The Company believes that its historical strategy of
providing personalized and consistent service to its small and middle-market
corporate customers and individuals will allow it to continue to compete
profitably, not only in the markets that it presently serves but in other
markets as well.
BUSINESS STRATEGY
The Company's primary goal is to enhance profitability and shareholder
returns through aggressive but sound growth. The Company's long-term strategy is
to (i) continue to grow its full service banking capabilities in the Expansion
Markets, (ii) leverage existing branch capacity, (iii) expand its mortgage,
consumer and commercial lending activities, and (iv) continue to differentiate
itself from its larger competitors by emphasizing personalized,
relationship-driven service provided by a locally-headquartered financial
institution.
EXPAND IN UNDER-SERVED MARKETS
The consolidation of the banking industry in Northeast Florida has created
a window of opportunity for the Company to expand its operations in the
Expansion Markets. The Expansion Markets are contiguous and culturally similar
to the Core Markets. Like the Core Markets, the Expansion Markets consist in
large part of individuals and small and medium-sized businesses. The Company
believes that its familiarity with meeting the banking needs and expectations of
similar customers in the Core Markets makes the Company particularly qualified
to attract banking customers accustomed to banking with community banks in the
Expansion Markets. The recent consolidation also has dislocated qualified
banking professionals who have strong ties to and an understanding of their
local markets. The Company believes that it has attracted and will continue to
attract qualified banking professionals, thereby benefiting from their
experience and their ability, in many instances, to bring with them the banking
business of their loyal customers. These factors, together with the Bank's asset
size and its capital base, position the Company to work more effectively with
middle-market customers than many smaller community banks in the Expansion
Markets.
PROVIDE COMMUNITY BANKING SERVICE
The Company believes that it can achieve the goals outlined above through a
continued commitment to the "community bank philosophy," which emphasizes
offering a broad range of personalized products and services through banking
professionals who understand the banking industry and the banking needs of the
local communities they serve. Each branch manager and individual loan officer is
4
given a certain degree of authority and discretion to approve loans and to price
loans and services in order to respond quickly and efficiently to the needs of
the Company's customers. In implementing this strategy, the Company will combine
the experience and customer networks of its loan officers with centralized
information technology to effectively price and provide customized banking
services to enhance overall profitability. The Company intends to pursue this
strategy throughout its Core and Expansion Markets and operate a multi-office
community bank that emphasizes decision-making at the local level.
To ensure that the Company's proposed expansion does not erode its
standards for service and quality, the Company created four operating divisions:
the Gainesville Division (Alachua County), the TriCounty Division (Baker,
Bradford and Union counties), the Suwannee Valley Division (Columbia and
Suwannee Counties) and the First Coast Division (Duval and St. Johns Counties).
This organizational structure will help to ensure that the Company's banking
products and services are tailored to the individual markets it serves, as
opposed to the "one size fits all" approach that generally is followed by larger
financial institutions. The divisions are headed by Division Presidents who
effectively have the authority to operate the division as a community bank, so
long as it is done within the parameters of the Company's policies and long-term
strategy.
DEPOSIT PRODUCTS AND SERVICES
The Company, through its banking subsidiary, offers various deposit
products and services to its retail and commercial customers. These products
include commercial and retail checking accounts, specialized low-cost checking
for customers who write few checks per month, money market accounts for
consumers and commercial customers, bundled account products including the
Generations Gold(TM) affinity program, NOW accounts and savings accounts.
Additionally, the Company offers an interest-bearing transaction account for
seniors with no minimum balance requirements, no service charge and no per-check
charge. For customer convenience and ease of storage, the Company offers
image-based monthly account statements, as well as an automated telephone
banking service for balance reporting. The Company also offers internet banking
services, which allow customers to check balances, transfer funds and pay bills
on-line. The Company's deposit services include cash management for commercial
customers for overnight investment, wire transfer services, collections, money
orders, safe deposit boxes and traveler's checks. The Bank is currently a member
of the STAR (formerly HONOR), PLUS and CIRRUS networks of automated teller
machines that may be used by Bank customers in major cities throughout the
United States. The Federal Deposit Insurance Corporation ("FDIC") insures all
deposits up to the maximum amount permitted by law (generally $100,000 per
depositor subject to aggregation rules).
LOAN PRODUCTS AND LENDING POLICY
GENERAL
The Company provides to customers a full range of short- to medium-term
commercial, agricultural, Small Business Administration ("SBA") guaranteed,
Farmers Home Administration guaranteed, long term residential mortgages and
personal loans, both secured and unsecured. Credit is extended consistent with a
comprehensive loan policy that governs advance rates, maturities and acceptable
collateral. The Company's loan policy grants lending authority using a tiered
schedule that grants authority to officers based on certain risk parameters
including the collateral type. The Executive Loan Committee of the Bank's Board
of Directors must approve loans exceeding officer authority and exhibiting
certain risk parameters. Exceptions to the policy must be recommended by the
applicable officer and approved by either a Division President or the Credit
Administrator within their authority and approved by the Executive Loan
Committee.
COMMERCIAL LOANS
Commercial loan products include short-term loans and lines of credit for
working capital purposes. These loans are generally secured by the borrower's
current assets, typically accounts receivable and inventory. Other commercial
loan products include intermediate term loans for farm and non-farm equipment,
agricultural loans and SBA guaranteed loans. SBA guaranteed loans include
secured and unsecured loans for working capital, business expansion and
purchases of equipment and machinery.
Lines of credit are subject to annual review and approval, generally no
later than 120 days after the closing of the customer's fiscal year-end.
5
Advances are typically limited to 75% of eligible accounts receivable and up to
50% on inventory. These credits are usually monitored through the review of a
receivables aging report and borrowing base report.
Term loans having maturities greater than one year are generally secured by
equipment with advances limited to no more than 75% of cost. In virtually all
cases, the Bank requires the personal guaranty of the owners or major
shareholders of the borrower.
Agricultural loans are granted to experienced farmers with demonstrated
capabilities, acceptable historical cash flows, reasonable cash flow projections
and adequate secondary sources of repayment.
COMMERCIAL REAL ESTATE LOANS
The Company's commercial real estate lending products include: construction
loans, mini-permanent and permanent financing for commercial properties,
acquisition and development loans for residential and commercial property
developers and investment property financing.
Construction loan borrowers are generally required to provide equity equal
to at least 20% of the total cost of the construction project before the Company
will advance funds on the loan. The Company advances funds pursuant to a draw
schedule and makes inspections prior to each draw request. The Company's
construction lending requirements also may include a plan and cost review,
depending on the complexity of the project. The plan and cost review and the
inspections are out-sourced by the Company to qualified professionals.
Mini-permanent and permanent financing loans are owner occupied projects
which demonstrate proven cash flows that result in a debt service coverage ratio
of at least 1.25 to 1, based on a twenty-year amortization. Mini-permanent loan
amortization may be as long as twenty-five years, but normally requires balloon
maturities within five to eight years.
The Company extends acquisition and development loans to borrowers who have
historically fulfilled their financial obligations. The relevant acquisition or
development project must demonstrate acceptable absorption periods and should
have an equity investment of at least 20% of the total project cost. Such loans
typically mature within thirty months.
Loans on investment property are subject to the same underwriting criteria
as mini-permanent loans and include a threshold debt service coverage ratio of
at least 1.25 to 1.
RESIDENTIAL AND CONSUMER LOANS
Consumer lending products include open- and closed-ended home equity and
home improvement loans, automobile, boat, and recreational vehicle loans and
loans for other asset purchases. The Company offers Visa and MasterCard credit
and debit card products to consumers and commercial customers. Credit cards are
originated in conjunction with a separate financial institution through which
the Company has a contractual relationship. Credit decisions and credit risk are
handled entirely by the third party institution. The Company continues to carry
the receivables on card balances generated prior to the initiation of this
relationship.
Loans to consumers are extended after a credit evaluation that includes a
review of the creditworthiness of the borrower, the purpose of the credit, and
the secondary source of repayment. Specifically, the lender reviews a credit
bureau report for the borrower's credit history and calculates a debt-to-income
ratio based on the borrower's gross monthly income to fixed debt payments. A
ratio higher than 40% is generally considered unacceptable. For automobile
loans, the policy requires a minimum down payment of 10% with maturities based
on the age of the vehicle.
The Company offers a variety of 1-4 family residential loan products,
including residential construction loans and residential acquisition financing.
Residential construction financing typically includes a construction loan
agreement with a construction draw schedule and third party inspections. A
commitment for permanent financing is required prior to closing. Typical
residential construction loans mature within six to twelve months. The Company
6
offers a construction/permanent package loan product in instances where the
Company acts as the permanent lender.
Residential loans are originated for the Company's portfolio, as well as
for sale in the secondary market. The maximum loan amount is based on a loan to
value ratio of 80% or less, where the value is equal to the lesser of the cost
or the appraised value. A higher loan to value ratio is available when private
mortgage insurance can be obtained. Most of these loans are originated for sale
in the secondary market and are sold on a servicing released basis. The Company
services loans originated for its portfolio.
LOAN REVIEW AND NONPERFORMING ASSETS
The Company's loan review officer is independent of the loan production and
administration process. The loan review officer has the responsibility to
perform timely reviews of portfolio credits with scope and assessment criteria
comparable to that of the Bank's regulators. Additionally, a comprehensive
annual review is conducted on all credits over $1 million, past dues,
non-performing assets and other real estate owned. Loan operations personnel
review smaller credits utilizing pre-determined standards, which include
documentation and compliance, with exceptions referred to the loan review
officer. Problem credits, which include all non-performing assets, are reviewed
at least quarterly with written documentation that includes the reason for the
problem, collateral support, a plan for resolution of the problem and a time
frame for the resolution. Delinquent loans are reviewed at least weekly by Risk
Management and monitored monthly by the Board of Directors of the Bank.
A written report is developed on the findings of the various loan review
functions and reported directly to the Audit Committee of the Company's Board of
Directors, which meets at least quarterly. The allowance for loan losses is
reviewed monthly in order to make the appropriate loan loss provision based on
the loan review findings, delinquency trends, historical loan losses and current
economic trends.
INVESTMENT SERVICES
During 2001, the Company launched its CNB Financial Services unit, which is
geared toward offering customers an alternative investment vehicle to bank
products. These services are being offered through a strategic alliance
relationship with Raymond James and are being sold through brokers who are
employed by the Bank. It is expected that this business line will offer
complementary alternatives to customer funds and will allow the Bank to continue
earning fee income on relationships that may have otherwise left the Bank.
Customer balances related to CNB Financial Services are not recorded in the
financial statements of the Company since the accounts are held with Raymond
James. The Company earns fees based upon the level of funds invested with
Raymond James that were originated through CNB Financial Services. This business
unit is in the start-up phase and did not materially contribute to the Company's
results of operations during 2001 or 2002.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability policy is carried out through the Bank's risk
management function. The Bank manages asset growth, liquidity and capital in
order to maximize income and reduce interest rate risk. The risk management
group reviews and discusses the ratio of rate-sensitive assets to rate-sensitive
liabilities, the ratio of allowance for loan losses to outstanding and
nonperforming loans, and other variables, such as expected loan demand,
investment opportunities, core deposit growth within specified categories,
regulatory changes, monetary policy adjustments and the overall state of the
economy.
INVESTMENT POLICY
The Bank's investment portfolio policy is to maximize income consistent
with liquidity, asset quality, regulatory constraints and asset/liability
objectives. The Bank invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United States
and obligations of agencies of the United States. In addition, the Bank enters
into federal funds transactions with its principal correspondent banks. Other
investments consist primarily of Federal Reserve Bank and Federal Home Loan Bank
stock that are required for the Bank to be a member of, and to conduct business
7
with, such institutions. Dividends on such investments are determined by the
institutions and are payable semi-annually or quarterly.
COMPETITION
Within each market in which the Company operates (collectively, the "CNB
Markets"), there are competing financial institutions consisting primarily of
other commercial banks, savings and loan offices and credit unions. Certain
non-bank financial institutions affiliated with Florida banks or thrift
institutions offer limited financial services, including lending and deposit
gathering activities. The Bank also competes for deposits and loans with
brokerage firms, mobile home lenders, consumer finance companies, insurance
companies, mortgage banking companies, money market mutual funds and other
financial service companies.
In addition, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Banking and Branching Act") has removed
substantially all state barriers to the acquisition of banks by out-of-state
bank holding companies. In addition, certain out-of-state bank holding companies
have entered the Florida banking market by acquiring failing thrift institutions
and commercial banks. Florida banks and bank holding companies also may enter
the CNB Markets by acquiring a financial institution, by establishing de novo
branches or by forming de novo banks.
Competition for deposit and loan business in the CNB Markets will continue
to be intense because of existing competitors, the accelerating pace of product
deregulation and the likelihood of expansion into the CNB Markets by other
institutions. Many of these institutions have significantly greater financial
resources than the Company. To compete, the Bank relies on specialized services,
responsive handling of customer needs, customer contact by Bank officers,
directors and staff, and the appeal of a locally-owned, relationship-driven
institution.
HISTORICAL GROWTH
The Bank has operated in Lake City, Columbia County, Florida since its
organization in 1986. In January 1987 the Company was formed as a bank holding
company to facilitate expansion opportunities. In 1988, the Company organized
Citizens Bank of Live Oak ("Citizens") and in 1990 opened its first de novo
branch in Fort White. In 1992 and 1993, the Bank acquired additional banking
offices in Macclenny, Lake City and Live Oak from Anchor Savings Bank. The
Company consummated its first merger with another bank holding company on April
1, 1994, when Bradford Bankshares ("Bradford") combined with the Company
resulting in a branch in Starke, Florida. On August 31, 1996, Riherd Bank
Holding Company ("Riherd") merged with the Company. The Riherd merger resulted
in three additional offices for the Bank, one of which is located in Lake
Butler, Florida and two in Gainesville. Both the Bradford and the Riherd
transactions were accounted for as purchase transactions. In August 1997, the
Bank opened its eleventh office, located in Lake City, and in June 1999 expanded
into Jacksonville with its twelfth office. The Bank opened its second
Jacksonville branch in February 2001, and opened a St. Augustine branch in June
2001. In May 2001, the Bank purchased the Lake City and Live Oak branches of
Republic Bank. In connection with the transaction, the Bank closed one of its
existing Live Oak locations and in early 2003 closed one of its Lake City
locations.
EMPLOYEES
As of December 31, 2002, the Bank had 253 full-time equivalent employees.
The Company's operations are conducted through the Bank and, consequently, the
Company does not have any separate employees.
SUPERVISION AND REGULATION
GENERAL
As a registered bank holding company, the Company is subject to the
supervision of, and regular inspection by, the Federal Reserve Board of
Governors (the "Federal Reserve") under the BHC Act. The Bank is organized as a
national banking association, which is subject to regulation, supervision and
examination by the Comptroller. The Bank is also subject to regulation by the
FDIC and other federal regulatory agencies. In addition, the Company and the
Bank are subject to various other laws and regulations and supervision and
examination by other regulatory agencies, all of which directly or indirectly
8
affect the operations and management of the Company and the Bank and their
ability to make distributions. The following discussion summarizes certain
aspects of those laws and regulations that affect the Company and the Bank.
The Holding Company is regulated by the Federal Reserve under the BHC Act
which requires every bank holding company to obtain the prior approval of the
Federal Reserve before acquiring more than 5% of the voting shares of any bank
or all or substantially all of the assets of a bank, and before merging or
consolidating with another bank holding company. The Federal Reserve (pursuant
to regulation and published policy statement) has maintained that a bank holding
company must serve as a source of financial strength to its subsidiary banks. In
adhering to the Federal Reserve policy, the Holding Company may be required to
provide financial support for a subsidiary bank at a time where absent such
Federal Reserve policy, the Holding Company may not deem it advisable to provide
such assistance.
Until March 2000, a bank holding company was generally prohibited from
acquiring control of any company which was not a bank and from engaging in any
business other than the business of banking or managing and controlling banks.
In April 1997, the Federal Reserve revised and expanded the list of permissible
non-banking activities in which a bank holding company could engage. However,
limitations continue to exist under certain laws and regulations. The
Gramm-Leach-Bliley Act repeals certain regulations pertaining to bank holding
companies and eliminates many of the previous prohibitions. Specifically, Title
I of the Gramm-Leach-Bliley Act repeals Sections 20 and 32 of Glass-Steagall Act
(12 U.S.C. 377 and 78, respectively) and is intended to facilitate affiliations
among banks, securities firms, insurance firms and other financial companies. To
further this goal, the Gramm-Leach-Bliley Act amends Section 4 of the BHC Act
(12 U.S.C. 1843) to authorize bank holding companies and foreign banks that
qualify as "financial holding companies" to engage in securities, insurance and
other activities that are financial in nature or incidental to a financial
activity. The activities of bank holding companies that are not financial
holding companies will continue to be limited to activities authorized currently
under the BHC Act, such as activities that the Federal Reserve previously has
determined in regulations and orders issued under section 4(c)(8) of the BHC Act
to be closely related to banking and permissible for bank holding companies.
Pursuant to the Interstate Banking and Branching Act, bank holding
companies are able to acquire banks in states other than their respective home
states, without regard to the permissibility of such acquisitions under state
laws. The transaction would still be subject to any state requirement that the
Bank has been organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the respective bank holding company,
prior to or following the proposed acquisition, controls no more than 10% of the
total amount of deposits of insured depository institutions in the United States
and less than 30% of such deposits in that state (or such lesser or greater
amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. Florida does not
prohibit interstate branching within the state. Furthermore, pursuant to the
Interstate Banking and Branching Act, a bank is now able to open new branches in
a state in which it does not already have banking operations if such state
enacts a law permitting de novo branching.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on the Company
and the Bank cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve, the Comptroller and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, those regulatory agencies may from time to
time require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth. The Federal Reserve risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for credit losses up to 1.25% of risk-weighted assets. The sum of Tier 1 and
Tier 2 capital less investments in unconsolidated subsidiaries represents
qualifying total capital, at least 50% of which must consist of Tier 1 capital.
Risk-based capital ratios are calculated by dividing Tier 1 and total capital by
9
risk-weighted assets. Assets and off-balance sheet exposures are assigned to one
of four categories of risk weights, based primarily on relative credit risk. The
minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%.
The Company's Tier 1 and total risk-based capital ratios under these guidelines
at December 31, 2002, were 7.4% and 8.5%, respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. The Company's leverage ratio at December 31, 2002 was 6.3%. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among
other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized), and requires
the respective federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee that bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of 5% of the bank's assets at the time
it became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors. In
addition, FDICIA requires the various regulatory agencies to prescribe certain
non-capital standards for safety and soundness related generally to operations
and management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of at least 8% and a
leverage ratio of at least 4%, or 3% in some cases.
Banking agencies have also adopted regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. That
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have adopted final regulations
requiring regulators to consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance sheet positions) in the determination of a bank's
capital adequacy. Concurrently, banking agencies have proposed a methodology for
evaluating interest rate risk. After gaining experience with the proposed
measurement process, those banking agencies intend to propose further
regulations to establish an explicit risk-based capital charge for interest rate
risk.
DISTRIBUTIONS
The Company's primary source of funds for cash distributions to its
shareholders is dividends received from the Bank. The Bank is subject to various
general regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain capital above regulatory minimums.
The appropriate federal regulatory authority is authorized to determine under
certain circumstances relating to the financial condition of the bank or bank
holding company that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment of dividends.
In addition to the foregoing, the ability of the Company and the Bank to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of the Bank is further
subject to the prior claims of creditors of the Bank.
10
"SOURCE OF STRENGTH" POLICY
According to Federal Reserve policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank. PROPERTIES
The Bank currently operates out of fourteen branch offices, one
administrative office and a non-customer operations center. All branches have
automated teller machines ("ATMs"). The Company owns the following properties:
APPROXIMATE SQUARE YEAR ESTABLISHED/
OFFICE LOCATION FOOTAGE ACQUIRED
- ------------------------------------------------------------------------------------------------------------------------------------
LAKE CITY (COLUMBIA COUNTY)
205 North Marion Avenue (1) ..................................... 22,000 1986
187 SW Baya Avenue .............................................. 10,100 1993
2844 U.S. 90 West ............................................... 2,900 1997
160 NW Main Blvd ................................................ 7,600 2001
1 CNB Place, East U.S. 90 (2) ................................... 20,800 1996
LIVE OAK (SUWANNEE COUNTY)
205 White Avenue, S.E ........................................... 6,000 1988
1562 South Ohio Avenue .......................................... 2,000 1993
535 South Ohio Avenue ........................................... 8,000 2001
FORT WHITE (COLUMBIA COUNTY)
7075 SW U.S. Hwy 27 ............................................. 2,200 1990
MACLENNEY (BAKER COUNTY)
595 South Sixth Street .......................................... 4,800 1992
STARKE (BRADFORD COUNTY)
606 West Madison Street ......................................... 8,000 1994
GAINESVILLE (ALACHUA COUNTY)
5027 Northwest 34th Street ...................................... 2,000 1996
7515 West University Avenue ..................................... 12,000 2000
11411 N. State Rd. 121 ........................................... 4,500 1996
LAKE BUTLER (UNION COUNTY)
300 West Main Street ............................................ 6,800 1996
JACKSONVILLE (DUVAL COUNTY)
9715 Gate Parkway North ......................................... 26,000 2000
ST. AUGUSTINE (ST. JOHNS COUNTY)
1980 U.S. 1 South ................................................ 5,000 2000
- -------------------------
(1) Main office and administrative office.
(2) Location of the operations center.
11
The Company also leases a branch in the Mandarin area of Jacksonville
(Duval County), which opened in February 2001, and a branch under construction
in the Magnolia Parke area of Gainesville, Florida that is expected to open in
2003. The Company also owns 1.57 acres of unimproved land in Glen St. Mary,
Florida that was acquired in 2001. The land will be used for the construction of
a branch banking facility that is expected to open in 2003.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of their properties are subject; nor are there material
proceedings known to be contemplated by any governmental authority; nor are
there material proceedings known to the Company, pending or contemplated, in
which any director, officer, affiliate or any principal security holder of the
Bank or the Company, or any associate of any of the foregoing is a party or has
an interest adverse to the Company.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
K. C. Trowell 64 Mr. Trowell is Chairman, Chief Executive
Officer and President of the Company and the
Bank. He was elected to the Board of Directors
in 1987 and serves as Chairman of the
Executive Committee of the Board of Directors
of the Company and the Bank. He has served as
the Chairman and Chief Executive Officer of
the Company since its inception in 1987. Mr.
Trowell is a Lake City, Florida, native and
has been actively involved in commercial
banking management in North Florida for over
30 years. He has also held management
positions with Bank of America in Lake City
(and its predecessors), American Bank of
Jacksonville, and Barnett Banks, Inc. in
Jacksonville. He is a former Chairman of the
Board of Trustees of Florida Bankers Insurance
Trust. He is a past director of Community
Bankers of Florida, past director of the
Columbia County Committee of 100, a founding
director of North Central Florida Areawide
Development Company, and a former board member
and chairman of both Lake City Medical Center
and Columbia County Industrial Development
Authority.
G. Thomas Frankland 56 Mr. Frankland is the Executive Vice President
and Chief Financial Officer of the Company and
the Bank. Mr. Frankland served as Vice
President and Chief Financial Officer of
AirNet Communications Corporation in
Melbourne, Florida, from March 1998 until he
joined the Company in November 1998. From May
1994 until August 1996, Mr. Frankland was Vice
Chairman and Chief Financial Officer of Ideon
Group, Inc. ("Ideon"). Following the
acquisition of Ideon by CUC International,
Inc. ("CUC"), in August 1996, Mr. Frankland
continued in a consulting capacity with CUC
through December 1997. Prior to May 1994, Mr.
Frankland was a partner with Price Waterhouse
LLP. During his 24 years with Price Waterhouse
LLP, including the seven years he served as
managing partner of the Jacksonville office,
he specialized primarily in the financial
services industry. He currently serves on the
Audit Committee of the Board of Directors of
the University of Florida Foundation, the
Warrington College of Business Advisory
Council, the Fisher School of Accounting
Steering Committee and the Board of Directors
of the North Florida Land Trust.
12
Martha S. Tucker 52 Ms. Tucker has served as Senior Vice President
and Controller of the Company and the Bank
since July 1997. From 1991 through 1997, Ms.
Tucker was Vice President and Cashier of the
Bank. From 1988 through 1991, Ms. Tucker was
Cashier for Citizens Bank of Live Oak, which
merged into the Bank in November 1992. From
1986 to 1988, Ms. Tucker served as Assistant
Cashier for the Bank and prior to 1986 held
management positions with NationsBank of Live
Oak (and its predecessors). Ms. Tucker is a
life-long resident of Live Oak, Florida and
has over 35 years of banking experience.
Robert E. Cameron 58 Mr. Cameron serves as the Southern Division
President of the Bank. Prior to joining the
Company in April 1998, Mr. Cameron was a
Senior Vice President of Barnett Bank of
Alachua County from 1988 until 1998. He also
was a member of the Board of Directors of
United Gainesville Community Development
Board. He has worked in the banking industry
for 33 years. Currently he is a member of the
Board of Directors of the Gainesville Builders
Association and Child Care Resources.
John D. Kennedy 46 Mr. Kennedy has served as the TriCounty
Division President of the Bank since August
1998. From 1996 through 1998, Mr. Kennedy was
the President of the Bank's Macclenny branch.
From October 1973 until August 1996 he was
with The Citizens Bank of Macclenny, where he
served as President beginning in January 1987.
Mr. Kennedy serves on the Lake City Community
College Endowment Trust Board. He is a member
of the Board of Directors of Baker County
Council on Aging and Baker County Tip-Off
Club. He is also Chairman of the Baker County
Education Foundation and President of the
Girls Softball League of Baker County. Mr.
Kennedy has 30 years of banking experience.
David H. Sheffield 39 Mr. Sheffield serves as the First Coast
Division President overseeing banking
activities in Duval and St. Johns counties.
Mr. Sheffield joined CNB National Bank in
1999. He has 17 years of banking experience in
the Jacksonville market, primarily in the
commercial lending functional area. Mr.
Sheffield began his career with Florida
National Bank in 1986 and has held positions
with Enterprise National Bank of Jacksonville
and Compass Bank in various lending and
management capacities. Mr. Sheffield is a
graduate of Clemson University with a B.S. in
Financial Management. He is also a graduate of
the ABA Commercial Lending Graduate School at
the University of Oklahoma and the Graduate
School of Banking at Louisiana State
University. He is actively involved in various
community and industry organizations and is
active as an elder at his church.
Suzanne M. Norris 39 Ms. Norris currently serves as Division
President for Suwannee Valley as well as
Senior Credit Administrator, a role she
assumed in 1997. Ms. Norris came to the Bank
in September 1996 and has 17 years of banking
experience, working in various management and
lending positions with NationsBank in St.
Petersburg, Tampa and Lake City, including
acting as commercial market manager/senior
banking executive for Lake City and
Gainesville from June 1995 to September 1996.
Ms. Norris, a graduate of the University of
Florida, has been active in the community,
having served as the President of the Lake
City/Columbia County Chamber of Commerce. She
currently serves on the Board of Trustees for
Lake City Community College, the Board of
Directors for the United Way of Suwannee
Valley and Epiphany Catholic School and is a
member of Altrusa.
13
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock. As of March 14, 2003, there were 6,125,500
shares of Common Stock issued and outstanding and 509 shareholders of record. In
addition, there were 536,253 shares subject to currently exercisable options. On
January 29, 1999, the Company's common stock began trading on the NASDAQ
National Market under the symbol "CNBB", resulting from the issuance of
1,250,000 shares of common stock in the Company's initial public offering at
$10.25 per common share. Proceeds from the offering net of underwriting discount
and expenses totaled $11.4 million. The Company contributed $10.0 million of the
$11.4 million net proceeds from the offering to CNB National Bank in February
1999. There is no trading information for any prior years, since there was not
an established market for the Company's common stock. See Table 12: "Selected
Quarterly Data" in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the quarterly market price for the last two fiscal
years.
Shareholders' equity at December 31, 2002 was $50.9 million, as compared to
$46.7 million at December 31, 2001. On July 15, 1998, the Company declared a
two-for-one stock split for shareholders of record on August 10, 1998, effective
August 17, 1998.
Company dividends for 2002, 2001 and 2000 consisted of the payment of
quarterly cash dividends in the amount of $0.05 per common share.
The Company's ability to pay dividends on the Common Stock depends
significantly on the ability of the Bank to pay dividends to the Company in
amounts sufficient to service its obligations. Such obligations include
principal and interest payments on outstanding long-term debt and may include an
obligation to make any payments with respect to securities issued in the future
which have an equal or greater dividend preference to the Common Stock. The Bank
may also issue additional capital stock or incur indebtedness, subject to
certain borrowing covenants outlined in the Company's line of credit agreement,
as amended, entered into with another bank during 2001 (see Management's
Discussion and Analysis - Item 7 of Part II). Furthermore, the regulations of
the Comptroller, regulatory capital levels and the net income of the Bank
determine its ability to pay dividends or make other capital distributions.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
Dollars in thousands except per share 2002 2001 2000 1999 1998
information
- ------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
Interest Income $ 41,398 $ 40,417 $ 32,061 $ 23,758 $ 21,119
Interest Expense (15,646) (19,629) (14,736) (9,052) (9,417)
--------- --------- ---------- --------- ----------
Net Interest Income 25,752 20,788 17,325 14,706 11,702
Provision for Loan Loss (2,375) (2,050) (1,350) (1,160) (710)
--------- --------- ---------- --------- ----------
Net Interest Income After
Provision for Loan Loss 23,377 18,738 15,975 13,546 10,992
Non-Interest Income 6,304 5,633 3,338 2,952 2,392
Non-Interest Expense (21,156) (19,836) (15,481) (11,994) (9,298)
--------- --------- ---------- --------- ----------
Income Before Income Taxes 8,525 4,535 3,832 4,504 4,086
Income Taxes (3,141) (1,594) (1,325) (1,563) (1,407)
--------- --------- ---------- --------- ----------
Net Income $ 5,384 $ 2,941 $ 2,507 $ 2,941 $ 2,679
========= ========= ========== ========= ==========
- ------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Basic Earnings $ 0.88 $ 0.48 $ 0.41 $ 0.49 $ 0.55
Diluted Earnings 0.87 0.48 0.41 0.48 0.55
Book Value 8.31 7.64 7.32 7.04 6.36
Dividends 0.20 0.20 0.20 0.20 0.20
Actual Shares Outstanding 6,125,500 6,106,453 6,099,376 6,116,070 4,856,770
Basic Weighted Average Shares Outstanding 6,104,050 6,094,670 6,095,471 5,995,474 4,856,770
Diluted Weighted Average Shares Outstanding 6,215,775 6,188,477 6,134,270 6,069,737 4,897,922
- ------------------------------------------------------------------------------------------------------------------
KEY RATIOS:
Return on Average Assets 0.81% 0.53% 0.62% 0.91% 0.93%
Return on Average Shareholders' Equity 11.03 6.43 5.74 7.03 8.92
Dividend Payout 22.73 41.67 48.78 40.82 36.36
Efficiency Ratio 66.00 75.08 74.92 67.92 65.97
Total Risk-Based Capital Ratio 8.52 9.00 12.00 17.25 16.62
Average Shareholders' Equity to Average
Assets 7.37 8.23 10.82 13.01 10.43
Tier 1 Capital to Average Assets/Leverage
Ratio 6.31 6.50 9.80 12.70 9.70
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION AT YEAR END:
Assets $ 730,674 $ 612,021 $ 467,593 $ 346,076 $ 311,565
Gross Loans 605,785 511,647 379,859 266,084 187,015
Deposits 648,636 532,891 367,686 288,203 265,109
Borrowings 25,446 28,148 51,142 12,063 12,570
Shareholders' Equity 50,921 46,669 44,636 43,075 30,896
- ------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Banking Locations 14 15 12 12 11
Full-Time Equivalent Employees 253 246 212 183 149
- ------------------------------------------------------------------------------------------------------------------
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, which
involve risks and uncertainties which are described in this Annual Report and in
other filings with the Securities and Exchange Commission (the "SEC"). The
actual results of CNB Florida Bancshares, Inc. (the "Company" or "CNB") may
differ significantly from the results discussed in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, increased competitive pressures among depository and other financial
institutions, changes in the interest rate environment that may reduce margins,
general economic or business conditions in the Company's markets that lead to a
deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with Selected
Historical Financial Information and the Consolidated Financial Statements of
the Company, which are included in this Form 10-K.
Overview
The following analysis reviews important factors affecting the financial
condition and results of operations of CNB Florida Bancshares, Inc. for the
periods shown. This section should be read in conjunction with the Consolidated
Financial Statements and related notes. The purpose of this discussion is to
facilitate a better understanding of the major factors and trends that affect
the Company's financial condition and earnings performance, and how the
Company's performance during 2002 compares with prior years. Throughout this
section, CNB Florida Bancshares, Inc. and its subsidiary, CNB National Bank, are
referred to as "CNB" or "the Company".
On January 29, 1999, CNB completed an initial public offering of 1,250,000
shares of common stock, which began trading on the NASDAQ National Market,
giving CNB shareholders greater access to purchasing or selling shares of common
stock. In addition, CNB obtained additional capital to support its expansion
plans, as well as for general corporate purposes. Of the $11.4 million net
proceeds from the offering, the Company contributed $10.0 million as capital to
CNB National Bank .
The Company continues to execute on its strategic growth initiatives that
were put in place during 1998. During 2002 the Company began laying the
groundwork for construction of a new branch on US 90 in Glen St. Mary and
entered into a lease agreement for a branch in the Magnolia Parke section of
Gainesville. Both of these branches are expected to open for business in 2003.
In 2001 the Company added two branches to its First Coast market (Jacksonville
and St. Augustine) and acquired two branches from Republic Bank (Lake City and
Live Oak). The branch acquisitions occurred in May 2001 and resulted in the
16
addition of loans, deposits and premises and equipment of approximately $12
million, $62 million and $2 million, respectively. In connection with the
acquisition, the Bank recorded a core deposit intangible of $6 million, which is
being amortized over its estimated useful life of 10 years. The Company's
conversion to an improved data processing platform in the fourth quarter of 2000
and the move into the expanded Operations Center in the first half of 2001 has
improved operational support to our growth initiatives and has allowed us to
become more customer focused and cost-efficient.
The Company officially relocated its corporate offices to Jacksonville,
Florida effective January 2001. Operational headquarters for CNB National Bank
continue to be located in Lake City.
Results of Operations
The Company's earnings for 2002 were $5.4 million, or $0.87 per diluted
share, compared to $2.9 million, or $0.48 per diluted share, and $2.5 million,
or $0.41 per diluted share, in 2001 and 2000, respectively. These results
reflect growth in net interest income and non-interest income. The decline in
interest expense reflects the impact of declining interest rates throughout
2002. Total assets increased to $730.7 million at December 31, 2002 compared to
$612.0 million at December 31, 2001, an increase of 19%. Included in the results
for 2001 is the impact of the acquisition of the Lake City and Live Oak branches
of Republic Bank in May 2001.
Net Interest Income/Margins
Net interest income is the single largest source of revenue for the Bank
and consists of interest and fee income generated by earning assets, less
interest expense paid on interest bearing liabilities. The Company's main
objective is to manage its assets and liabilities to provide the largest
possible amount of income while balancing interest rate, credit quality,
liquidity and capital risks. Net interest income was $25.8 million for 2002,
compared to $20.8 million and $17.3 million for the comparable prior year
periods of 2001 and 2000, respectively. The increase over 2001 was due to growth
in loans, transaction deposits and improved rates and spreads. During the first
half of 2003, we expect increased margin pressure as interest rates remain at
historically low levels. With our asset sensitivity, however, margin enhancement
is anticipated once rates rise, as is expected later in the year.
Average loan growth of $95 million was the main contributor to the increase
in average earning assets of $106.7 million, or 21%. Increases in time, money
market and interest bearing deposits, including those accounts acquired from
Republic Bank, were the main contributors in the $103.5 million, or 26%, growth
in average interest bearing liabilities.
The Company's net interest margin increased to 4.24% in 2002, compared to
4.15% in 2001. The increase in the margin is due to higher transaction deposit
balances and improved rates and spreads. Table 1 presents a comparative earning
asset composition as well as earning asset yields and interest bearing liability
rates for 2002, 2001 and 2000. Table 1a shows the changes in net interest income
by category due to shifts in volume and rates for years presented.
17
Table 1: Average Balances, Yields and Rates
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Interest Interest Interest
Average Income or Average Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars in thousands)
ASSETS:
Federal Funds Sold $ 4,697 $ 73 1.55% $ 2,773 $ 102 3.68% $ 3,429 $ 208 6.07%
Investment Securities
Available for Sale 43,984 1,891 4.30 33,167 1,864 5.62 33,314 2,110 6.33
Investment Securities
Held to Maturity 1,667 99 5.94 6,278 384 6.12 9,869 572 5.80
Loans (1) 553,476 39,275 7.10 458,023 38,055 8.31 317,345 29,112 9.17
Interest Bearing Deposits 3,559 60 1.69 401 12 2.99 895 59 6.59
-------- --------- ------- -------- -------- ---- --------- --------- ----
TOTAL EARNING ASSETS 607,383 41,398 6.82 500,642 40,417 8.07 364,852 32,061 8.78
All Other Assets 55,173 55,233 38,424
-------- -------- ---------
TOTAL ASSETS $662,556 $555,875 $ 403,276
======== ======== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $192,108 3,432 1.79% $148,026 3,899 2.63% $ 110,387 3,731 3.38%
Savings 21,907 155 0.71 18,707 196 1.05 17,095 238 1.39
Time Deposits 291,205 11,213 3.85 235,010 13,656 5.81 151,674 9,019 5.95
Federal Funds Purchased and
Repurchase Agreements 13,174 191 1.45 14,609 552 3.78 9,565 572 5.98
Short Term Borrowings 33 1 3.04 20,932 1,061 5.07 17,377 1,176 6.77
Other Borrowings (2) 10,000 654 6.54 4,667 265 5.68 - - -
-------- --------- ------- -------- -------- ---- --------- --------- ----
TOTAL INTEREST BEARING
LIABILITIES 528,427 15,646 2.96 441,951 19,629 4.44 306,098 14,736 4.81
Demand Deposits 80,302 64,337 49,418
Other Liabilities 4,999 3,838 4,117
Shareholders' Equity 48,828 45,749 43,643
-------- -------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $662,556 $555,875 $ 403,276
======== ======== =========
---- ---- ----
INTEREST SPREAD (3) 3.86% 3.63% 3.97%
==== ==== ====
--------- -------- ---------
NET INTEREST INCOME $ 25,752 $ 20,788 $ 17,325
========= ======== =========
NET INTEREST MARGIN (4) 4.24% 4.15% 4.75%
==== ==== ====
- ----------
(1) Interest income on average loans includes loan fee recognition of $494,000,
$979,000 and $969,000 in 2002, 2001 and 2000 respectively. Nonperforming
loans are included in the average loan balance. Income on such
nonperforming loans is recognized on a cash basis.
(2) The interest expense and average rate on other borrowings includes the
impact of an interest rate swap that was entered into as a hedge of
interest rate risk associated with the underlying term debt in October
2001. Under the terms of the interest rate swap, the Company pays a fixed
rate of 6.45% and receives a floating rate of interest of 3-month Libor
plus 170 basis points. Interest on the swap and term debt is calculated
using a 360-day year.
(3) Represents the average rate earned minus average rate paid.
(4) Represents net interest income divided by total earning assets.
18
Table 1a: Analysis of Changes in Interest Income and Expense
NET CHANGE DECEMBER 31, NET CHANGE DECEMBER 31,
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 $ 71 $ (100) $ (29) $ (40) $ (66) $ (106)
Investment Securities Available for Sale 608 (581) 27 (9) (237) (246)
Investment Securities Held to Maturity (282) (3) (285) (208) 20 (188)
Loans 7,930 (6,710) 1,220 12,886 (3,943) 8,943
Interest Bearing Deposits 94 (46) 48 (33) (14) (47)
-------- -------- -------- -------- -------- --------
Total 8,421 (7,440) 981 12,596 (4,240) 8,356
INTEREST EXPENSE:
NOW & Money Markets 1,162 (1,629) (467) 1,272 (1,104) 168
Savings 34 (75) (41) 23 (65) (42)
Time Deposits 3,266 (5,709) (2,443) 4,956 (319) 4,637
Federal Funds Purchased and Repurchase Agreements (54) (307) (361) 302 (322) (20)
Short Term Borrowings (1,059) (1) (1,060) 241 (356) (115)
Other Borrowings 304 85 389 265 - 265
-------- -------- -------- -------- -------- --------
Total 3,653 (7,636) (3,983) 7,059 (2,166) 4,893
-------- -------- -------- -------- -------- --------
Net Interest Income $ 4,768 $ 196 $ 4,964 $ 5,537 $ (2,074) $ 3,463
======== ======== ======== ======== ======== ========
- ----------
(1) The volume variance reflects the change in the average balance outstanding
multiplied by the actual average rate during the prior period.
(2) The rate variance reflects the change in the actual average rate multiplied
by the average balance outstanding during the prior period. Changes which
are not solely due to volume changes or solely due to rate changes have
been attributed to rate changes.
Non-Interest Income
Non-interest income totaled $6.3 million in 2002, an increase of 12% from
the $5.6 million in 2001, and a 69% increase from 2000. Service charges on
deposit accounts increased $299,000 or 10% in 2002, compared with $528,000 or
22% in 2001. Secondary market mortgage sales increased in 2002 by $206,000 or
11%. The increase in secondary market mortgage sales was primarily attributed to
a strong housing market in the local economy and a continuation of historically
low interest rates. Other non-interest 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 $166,000 in 2002
compared to $195,000 in 2001. The increase in other fee income in 2002 was
primarily attributed to a $66,000 increase in securities gains and a $50,000
increase in investment services income. The investment securities sold in the
fourth quarter of 2002 were short-dated callable agency instruments with
premiums resulting from movements in interest rate markets. The securities were
sold as an economic hedge of a decline in net interest yield, which resulted
from a lowering of market interest rates during the fourth quarter.
Non-interest income as a percentage of average assets was 0.95% in 2002
compared to 1.01% and 0.83% in 2001 and 2000, respectively.
Non-Interest Expense
Non-interest expense increased by $1.3 million, or 7%, for 2002, compared
to an increase of $4.4 million, or 28%, for 2001. During 2002, non-interest
expenses as a percentage of average assets decreased to 3.19%, compared to 3.57%
and 3.84% in 2001 and 2000, respectively.
Salaries and employee benefits for 2002 increased $843,000 from 2001
compared to $1.7 million from 2000. As a percentage of average total assets,
salaries and employee benefits have decreased to 1.67% in 2002 compared to 1.84%
and 2.12% in 2001 and 2000, respectively.
19
Occupancy expenses (including furniture, fixtures & equipment) increased to
$3.4 million in 2002 compared to $3.1 million in 2001 and $2.2 million in 2000.
The main contributing factor for the 2002 increase was higher depreciation due
to a full year of depreciation for the Operations Center and the two purchased
Republic Branches. The major factors affecting the increase in occupancy
expenses from 2000 to 2001 relate to lease expense, higher real estate taxes,
utilities and depreciation on furniture and equipment for the new branches
opened in Jacksonville and St. Augustine, the two branches purchased from
Republic Bank, the relocation during 2000 into new facilities in Jacksonville
and Gainesville and the expansion of the Lake City Operations Center. CNB
continues to monitor and assess its facility and equipment needs as it positions
itself for future growth and expansion.
Other operating expenses at CNB increased 3% in 2002 compared to 2001 and
37% in 2001 compared to 2000. The increase in 2002 was attributable to: (1) an
increase of $224,000 in data processing fees resulting from higher transaction
volume with our core processor, utilization of additional processing
applications and contractual fee increases; (2) an increase of $169,000 in
telephone and related expenses, primarily due to an enhancement of bandwidth
capacity between each of the Company's branches; (3) an increase of $203,000 in
amortization of intangible assets due to the core deposit amortization on the
Republic branches for a full year; (4) an increase of $71,000 in legal and
professional costs. The increases in these areas were offset by decreases in
advertising, administrative, supplies and other operating expenses. The main
contributing factors to the increase in other operating expenses in 2001 was a
$120,000 increase in postage and delivery due to additional courier runs, an
increase of $454,000 in data processing fees resulting from the conversion to an
improved data processing platform and an increase of $364,000 in amortization
expense related to the core deposit intangible from the Republic Bank
acquisition. Other operating expenses in both 2001 and 2000 included goodwill
amortization of $70,000. Beginning in 2002, amortization of goodwill was
discontinued in accordance with the adoption of Statement of Financial
Accounting Standards No. 142 as discussed in Note 2 of Notes to Consolidated
Financial Statements.
The following table details the areas of significance in other operating
expenses.
Table 2: Other Operating Expenses
(Dollar amounts in thousands)
Year Ended December 31,
2002 2001 2000
---- ---- ----
Data processing $ 1,328 $ 1,104 $ 650
Communications 764 595 584
Amortization of intangible assets 746 543 179
Postage and delivery 700 671 551
Legal and professional 689 618 487
Advertising and promotion 532 687 541
Supplies 410 578 404
Loan expenses 242 248 194
Regulatory fees 239 255 149
Administrative 163 211 196
Education expense 131 101 62
Dues and subscriptions 97 100 103
Director fees 88 70 72
Other general operating 79 67 174
Insurance and bonding 76 105 89
Other 350 518 287
-------- --------- --------
Total other operating expenses $ 6,634 $ 6,471 $ 4,722
======== ========= ========
20
Income Taxes
The effective tax rate for the year ended December 31, 2002 was 36.8%,
compared to 35.2% for 2001 and 34.6% for 2000. The consolidated provision for
income taxes increased to $3.1 million in 2002, compared to $1.6 million in 2001
and $1.3 million in 2000.
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
$69.8 million and represented 11.9% of average total deposits during 2002,
compared to $55.0 million and 11.8% for 2001. The Company's loan to deposit
ratio at December 31, 2002 was 93%, compared to 96% at the end of 2001.
In addition to core deposit growth (defined as all deposits other than time
deposits in excess of $100,000), sources of funds available to meet liquidity
demands include cash received through ordinary business activities such as the
collection of interest and fees, federal funds sold, loan and investment
maturities and lines for the purchase of federal funds by the Company from its
principal correspondent banks. The Bank is also a member of the Federal Home
Loan Bank and has access to short-term and long-term funds. In addition, the
Company entered into a line of credit with one of its correspondent banks in
April 2001. The agreement was amended in October 2001 to reflect the following
structures: (1) a $3 million revolving line of credit maturing on June 30, 2002
(subsequently renewed through June 30, 2003) with interest floating quarterly at
3-month Libor plus 145 basis points; and (2) a $10 million term loan maturing
October 3, 2006 with interest floating quarterly at 3-month Libor plus 170 basis
points. Semi-annual principal payments of approximately $714,000 begin in 2004.
The Company also entered into a $10 million pay-fixed interest rate swap with
the same bank. The fixed rate under the interest rate swap is 6.45% and the
variable rate is based on 3-month Libor plus 170 basis points. The swap matures
October 3, 2006 and has been designated as a cash flow hedge of the variable
interest payments on the $10 million term loan noted in (2) above. The fair
value of the interest rate swap at December 31, 2002 was approximately
($691,000). There was $1 million outstanding on the $3 million line of credit on
December 31, 2002. The term loan, line of credit and interest rate swap are all
collateralized by 100% of the common stock of the Bank.
In connection with the term loan and line of credit agreement, the Company
is required to maintain compliance with certain covenants and restrictions. The
following financial covenants are to be maintained on a quarterly basis and are
calculated at the Bank-level:
o Interest coverage ratio of greater than or equal to 2.00x through
September 30, 2003.
o Debt service coverage ratio of greater than or equal to 0.85x through
September 30, 2002; 1.00x from October 1, 2002 through September 30,
2003; 1.25x from October 1, 2003 through September 30, 2004; and 1.50x
from October 1, 2004 through maturity.
o Ratio of non-performing assets to total loans plus other real estate
owned and repossessed assets of less than or equal to 1.25%.
o Maintenance of tier 1 and total risk based capital ratios that meet the
benchmarks for consideration as a "well-capitalized" institution
(currently 6% and 10%, respectively). Also, maintenance of a leverage
capital ratio of at least than 6%.
In addition, the Company is subject to the following restrictions:
o No additional debt is permitted without consent of the lender.
o No increases in dividends paid by the Company to its common
shareholders are permitted without consent of the lender.
21
Failure to maintain any of these covenants would place the Company in
default of the line of credit agreement. In such a case, absent any waivers
obtained from the lender, all amounts payable could be accelerated and become
due immediately. As of December 31, 2002, the Company was in compliance with all
covenants, except as noted below.
At December 31, 2002, the Bank's ratio of non-performing assets to total
loans plus other real estate owned and repossessed assets totaled 1.33%, which
exceeded the amount stipulated in the agreement of 1.25%. The Bank obtained a
waiver of default with respect to the non-performing assets ratio requirement as
of December 31, 2002.
The level of commitments to fund additional borrowings and standby letters
of credit also impacts the Company's liquidity position. These commitments, when
drawn, are generally funded through deposit inflows, loan and investment
maturities, interest receipts and, to the extent necessary, short term purchases
of federal funds. The Company's borrowing capacity under the FHLB is also
available to fulfill commitments to lend. Since many commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if any,
is based on management's credit evaluation in the same manner as though an
immediate credit extension were to be granted. Commitments to extend credit and
standby letters of credit amount to approximately $147,315,000 and $8,889,000,
respectively, at December 31, 2002 and expire as outlined in the table below (in
thousands):
Unfunded Standby
Commitments Letters of Credit
----------- -----------------
2003 $ 30,758 $ 7,971
2004 37,561 519
2005 28,605 399
2006 8,939 -
2007 10,614 -
Thereafter 30,838 -
---------- ---------
$ 147,315 $ 8,889
========== =========
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities, at a given time interval, including both
floating rate instruments and instruments that are approaching maturity.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize the
overall interest rate risks to the Company.
The Company's gap and liquidity positions are reviewed on a regular basis
by management to determine whether or not changes in policies and procedures are
necessary to achieve financial goals. Included in the review is an internal
analysis of the possible impact on net interest income due to market changes in
interest rates. Based on this internal analysis, at December 31, 2002, a gradual
increase in interest rates of 200 basis points would have increased net interest
income over the ensuing twelve-month period by 3.76%. A gradual decrease in
interest rates of 200 basis points over this same period would have decreased
net interest income by 3.83% as compared to a stable rate environment. At
December 31, 2001, the internal analysis estimated an increase in net interest
income of 1.09% and a decrease in net interest income of 1.11% for a similar 200
basis point increase and decrease in interest rates, respectively. The overall
interest rate sensitivity position increased over the prior year as the Company
focused on variable-rate lending and growth in demand and time deposits. The
Company considers this asset-sensitive position desirable given the perceived
likelihood of increasing interest rates over the foreseeable horizon.
The Company also monitors the Bank's market value of equity and its net
economic value ratio on a monthly basis. Market value of equity is defined as
the difference between the estimated fair value of the Bank's assets less the
estimated fair value of liabilities. The net economic value ratio is the market
value of equity divided by the market value of assets and measures the Bank's
capitalization, taking into account balance sheet gains and losses. At December
31, 2002, the Bank's net economic value ratio was 10.04% and 10.13%, assuming a
gradual increase or decrease, respectively, in interest rates of 200 basis
points over a 12-month period. At December 31, 2001, the Bank's net economic
value ratio was 10.53% and 10.93% for similar changes in interest rates.
22
Table 3, "Rate Sensitivity Analysis" presents rate sensitive assets and
liabilities, separating fixed and variable interest rate categories. The
estimated fair value of each instrument category is also shown in the table.
While these fair values are based on management's judgment of the most
appropriate factors, there is no assurance that, were the Company to have
disposed of such instruments on December 31, 2002, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances.
23
Table 3: Rate Sensitivity Analysis
December 31, 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 $ 112,930 $ 51,890 $ 38,900 $ 34,665 $ 53,539 $ 95,892 $387,816 $407,523
Average Interest Rate 7.04% 7.33% 7.75% 7.50% 7.30% 7.00% 7.22%
Variable Rate Loans 62,814 27,520 21,583 13,545 9,841 82,666 217,969 218,028
Average Interest Rate 4.81% 5.07% 5.24% 5.70% 6.72% 7.49% 6.04%
Investment Securities(1)
Fixed Rate Investments 8,064 14,497 5,474 - - 17,317 45,352 46,201
Average Interest Rate 2.41% 5.05% 4.37% 4.45% 4.27%
Variable Rate Investments - - - - - 471 471 484
Average Interest Rate 5.34% 5.34%
Federal Funds Sold 5,400 - - - - - 5,400 5,400
Average Interest Rate 1.17% 1.17%
Other Earning Assets(2) 15,212 - - - - - 15,212 15,212
Average Interest Rate 2.19% 2.19%
--------- -------- -------- -------- -------- -------- -------- --------
Total Interest-Earning Assets $ 204,420 $ 93,907 $ 65,957 $ 48,210 $ 63,380 $196,346 $672,220 $692,848
Average Interest Rate 5.66% 6.32% 6.65% 6.99% 7.21% 6.98% 6.48%
========= ======== ======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
- -----------------------------
NOW $ 65,437 $ - $ - $ - $ - $ 53,182 $118,619 $118,619
Average Interest Rate 1.96% 0.51% 1.31%
Money Market 90,798 - - - - 4,556 95,354 95,354
Average Interest Rate 2.36% 1.24% 2.31%
Savings - - - - - 22,311 22,311 22,311
Average Interest Rate 0.50% 0.50%
CD's Under $100,000 109,390 28,964 25,033 8,537 747 - 172,671 174,134
Average Interest Rate 2.95% 3.89% 4.15% 4.43% 5.11% 3.36%
CD's $100,000 and Over 117,910 21,677 12,916 4,968 2,145 - 159,616 160,705
Average Interest Rate 3.49% 4.15% 4.39% 4.54% 5.27% 3.71%
Securities Sold Under
Repurchase Agreements and
Federal Funds Purchased 14,446 - - - - - 14,446 14,446
Average Interest Rate 0.85% 0.85%
Short Term Borrowings
Average Interest Rate 1,000 - - - - - 1,000 1,000
2.85% 2.85%
Other Borrowings(3) - 1,428 1,428 7,144 - - 10,000 10,000
Average Interest Rate 3.46% 3.46% 3.46% 3.46%
--------- -------- -------- -------- -------- -------- -------- --------
Total Interest-Bearing Liabilities $ 398,981 $ 52,069 $ 39,377 $ 20,649 $ 2,892 $ 80,049 $594,017 $596,569
Average Interest Rate 2.74% 3.99% 4.20% 4.12% 5.23% 0.55% 2.71%
========= ======== ======== ======== ======== ======== ======== ========
- ----------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net unrealized gains of $862,000.
(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 June 30, 2006 that bears
interest at 3-month Libor plus 170 basis points. The variable rate is reset
quarterly. The variable interest payments on the term loan are being hedged
through an interest rate swap. Under the interest rate swap, the Company
pays a fixed rate of interest of 6.45% and receives a floating rate of
interest of 3-month Libor plus 170 basis points. Other terms of the swap
mirror those of the term debt.
24
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, averaged 77% of total average deposits in 2002 and 80% in
2001. The Company closely monitors its reliance on time deposits in excess of
$100,000. The Bank does not nor has it ever solicited brokered deposits. Table 4
sets forth the amounts of time deposits with balances of $100,000 or more that
mature within indicated periods.
Table 4: Maturity of Time Deposits of $100,000 or More
December 31, 2002
Amount
------
(thousands)
Three Months or Less $ 34,724
Three Through Six Months 35,910
Six Through Twelve Months 47,276
Over Twelve Months 41,706
----------
Total $ 159,616
==========
Earning Assets
Loans
Lending activities are CNB's single largest source of revenue. Although
management is continually evaluating alternative sources of revenue, lending is
the major segment of the Company's business and is key to profitability. Average
loans for the year ended December 31, 2002 were $553.5 million, or 91% of
average earning assets as compared to $458.0 million, or 91% of average earning
assets for 2001.
The commercial loan portfolio includes commercial, financial and
agricultural loans as well as commercial real estate loans. As of December 31,
2002, the commercial loan portfolio comprised 61% of total loans compared to 55%
in 2001.
As of December 31, 2002 the Company had total gross loans of $605.8
million, compared to $511.6 million at December 31, 2001, an increase of $94.1
million or 18%. The composition of the Company's loan portfolio for the past
five years is presented in Table 5.
Table 5: Loan Portfolio Composition
As of December 31,
Types of Loans 2002 2001 2000 1999 1998
(thousands)
Commercial, Financial and Agricultural $ 366,954 $ 280,453 $ 192,540 $ 136,937 $ 85,208
Real Estate - Construction 52,596 41,064 33,648 18,926 8,527
Real Estate - Mortgage 145,815 147,973 119,701 86,275 72,357
Installment and Consumer 40,420 42,157 33,970 23,946 20,923
----------- ---------- ---------- ---------- ---------
Total Loans, Net of Unearned Discount 605,785 511,647 379,859 266,084 187,015
Less: Allowance for Loan Losses (6,574) (5,205) (3,670) (2,671) (1,875)
----------- ---------- ---------- ---------- ---------
Net Loans $ 599,211 $ 506,442 $ 376,189 $ 263,413 $ 185,140
=========== ========== ========== ========== =========
Table 6 sets forth the maturity distribution for selected components of the
Company's loan portfolio as of December 31, 2002. Demand loans and overdrafts
are reported as due in one year or less, and loan maturity is based upon
scheduled principal payments.
25
Table 6: Maturity Schedule of Selected Loans
December 31, 2002
0-12 1-5 Over 5
Months Years Years Total
------ ----- ----- -----
(thousands)
Commercial, Financial & Agricultural $ 90,062 $ 153,055 $ 123,837 $ 366,954
Real Estate - Construction 16,526 23,923 12,147 52,596
All Other Loans 69,156 74,505 42,574 186,235
---------- ---------- ---------- ---------
Total $ 175,744 $ 251,483 $ 178,558 $ 605,785
========== ========== ========== =========
Fixed Interest Rate $ 112,930 $ 178,994 $ 95,892 $ 387,816
Variable Interest Rate $ 62,814 $ 72,489 $ 82,666 $ 217,969
Loan concentrations are considered to exist where there are amounts loaned
to multiple borrowers engaged in similar activities which collectively would be
similarly impacted by economic or other conditions and when the total of such
amounts exceed 25% of total capital. Due to the lack of diversified industry and
the relative proximity of markets served, the Company has concentrations in
geographic as well as in types of loans funded. At December 31, 2002, the Bank's
four largest concentration categories are: Land Development ($38.7 million),
Commercial Real Estate ($29.9 million), Professional ($27.2 million) and
Commercial Construction ($26.1 million).
Loan Quality
Non-performing assets consist of non-accrual loans, loans past due 90 days
or more and still accruing interest, other real estate owned and repossessions.
Non-performing assets increased from $2.9 million at December 31, 2001 to $8.1
million at December 31, 2002. Non-performing assets as a percentage of total
assets increased to 1.11% in 2002 from 0.47% in 2001. The increase in
non-performing assets was primarily attributed to three separate relationships
totaling approximately $5.0 million. One of the credits is a commercial loan
totaling $623,000 at December 31, 2002. The credit is collateralized by rolling
stock, inventory and storage contracts. The Bank has estimated its loss on this
credit to be approximately $375,000. The other two of the relationships,
totaling $4.4 million at December 31, 2002, are commercial real estate secured
and are collateralized by an apartment complex and a renovated commercial
building. The Bank does not anticipate any significant losses on these two
credits at this time.
Management is continually analyzing its loan portfolio in an effort to
recognize and resolve its problem assets as quickly and efficiently as possible.
Table 7 sets forth certain categories of risk elements on non-performing assets
for the past five years.
Table 7: Non-Performing Assets
December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
Non-Accrual Loans $ 5,611 $ 1,377 $ 579 $ 549 $ 1,393
Past Due Loans 90 Days or
More and Still Accruing 2,439 1,271 840 180 22
Other Real Estate Owned &
Repossessions 24 229 56 102 613
-------- -------- -------- -------- --------
Total Non-Performing Assets $ 8,074 $ 2,877 $ 1,475 $ 831 $ 2,028
======== ======== ======== ======== ========
Percent of Total Assets 1.11% 0.47% 0.32% 0.24% 0.65%
======== ======== ======== ======== ========
26
The allowance for loan loss is an amount that management believes will be
adequate to absorb inherent losses on existing loans that may become
uncollectible based on evaluations of the collectibility of the loans. The
allowance for loan loss is established through a provision for loan loss charged
to expense. Loans are charged against the allowance for loan loss when
management believes that the collectibility of the principal is unlikely. The
evaluation of collectibility takes into consideration such objective factors as
changes in the nature and volume of the loan portfolio 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 loss on December 31, 2002, was $6.6 million, or
1.09% of total loans outstanding, net of unearned income compared to $5.2
million, or 1.02% on December 31, 2001. Table 8: "Allocation of Allowance for
Loan Losses," set forth below, indicates the specific reserves allocated by loan
type.
Table 8: Allocation of Allowance for Loan Loss
December 31,
2002 2001 2000 1999 1998
----------------- ----------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Commercial, Financial
and Agricultural $ 4,929 60.6% $ 3,669 54.8% $ 2,607 50.7% $ 1,670 51.5% $ 1,061 45.6%
Real Estate - Construction 27 8.7% 25 8.0% 15 8.9% 12 7.1% 6 4.5%
Real Estate - Mortgage 538 24.1% 484 29.0% 293 31.5% 220 32.4% 127 38.7%
Consumer 1,080 6.6% 932 8.2% 734 8.9% 769 9.0% 621 11.2%
Unallocated - - 95 - 21 - - 60 - -
-------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total $ 6,574 100% $ 5,205 100% $ 3,670 100% $ 2,671 100% $ 1,875 100%
======== === ======== === ======= === ======== === ======== ===
27
Table 9: "Activity in Allowance for Loan Loss" indicates activity in the
allowance for loan losses for the last five years.
Table 9: Activity in Allowance for Loan Loss
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
Balance at Beginning of Year $ 5,205 $ 3,670 $ 2,671 $ 1,875 $ 1,495
Allowance Acquired by Acquisition - 110 - - -
Loans Charged-Off:
Commercial, Financial and Agricultural 756 410 75 312 123
Real Estate - Mortgage 71 59 40 13 3
Consumer 405 406 409 309 296
--------- --------- --------- --------- ---------
Total Loans Charged-Off (1,232) (875) (524) (634) (422)
Recoveries on Loans Previously Charged-Off:
Commercial, Financial and Agricultural 96 116 32 188 41
Real Estate - Mortgage 33 17 - - 7
Consumer 97 117 141 82 44
--------- --------- --------- --------- ---------
Total Loan Recoveries 226 250 173 270 92
--------- --------- --------- --------- ---------
Net Loans Charged-Off (1,006) (625) (351) (364) (330)
--------- --------- --------- --------- ---------
Provision for Loan Losses
Charged to Expense 2,375 2,050 1,350 1,160 710
--------- --------- --------- --------- ---------
Ending Balance $ 6,574 $ 5,205 $ 3,670 $ 2,671 $ 1,875
========= ========= ========= ========= =========
Total Loans Outstanding $ 605,785 $ 511,647 $ 379,859 $ 266,084 $ 187,015
Average Loans Outstanding $ 553,476 $ 458,023 $ 317,345 $ 215,861 $ 171,048
Allowance for Loan Loss
to Loans Outstanding 1.09% 1.02% 0.97% 1.00% 1.00%
Net Charge-Offs to
Average Loans Outstanding 0.18% 0.14% 0.11% 0.17% 0.19%
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 $49.7 million at December 31, 2002, an increase of 34% from $37.1
million at December 31, 2001.
Securities are classified as either held-to-maturity or available-for-sale
and are recorded at amortized cost and fair market value, respectively. At
December 31, 2002 investment securities available-for-sale made up 100% of the
total investment portfolio of $49.7 million. Securities in the
available-for-sale portfolio are recorded at fair value on the balance sheet and
unrealized gains and losses associated with these securities are recorded, net
of tax, as accumulated other comprehensive income (loss). At December 31, 2002,
accumulated other comprehensive income included a net unrealized gain of
$108,000, compared to a $326,000 net unrealized gain at December 31, 2001. Also
included in other comprehensive income is accumulated net gains (losses) on cash
flow hedges.
As a percent of total earning assets, the investment portfolio has remained
relatively constant at a level of 7% at December 31, 2002 compared to the end of
2001.
The Company invests primarily in direct obligations of the United States,
obligations guaranteed as to the principal and interest by the United States and
obligations of agencies of the United States. In addition, the Company enters
into federal funds transactions with its principal correspondent banks. The
Federal Reserve Bank and Federal Home Loan Bank also require equity investments
to be maintained by the Company.
28
The following tables sets forth the maturity distribution and the weighted
average yields of the Company's investment portfolio.
Table 10: Maturity Distribution of Investment Securities (1)
December 31, 2002
Dollars in Thousands Held to Maturity Available for Sale
- --------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------ ------------ ------------ ------------
U.S. Treasuries:
One Year or Less $ - $ - $ 4,008 $ 4,016
------------ --------- ------------ ---------
Total U.S. Treasuries - - 4,008 4,016
U.S. Government Agencies
and Corporations:
One Year or Less - - 4,056 4,088
Over One Through Five Years - - 19,971 20,592
------------ --------- ------------ ---------
Total U.S. Government Agencies
and Corporations - - 24,027 24,680
Obligations of State and Political
Subdivisions:
Over Five Through Ten Years - - 608 650
Over Ten Years - - 1,135 1,135
------------ --------- ------------ ---------
Total Obligations of State and
Political Subdivisions - - 1,743 1,785
Mortgage-Backed Securities (2):
Over Five Through Ten Years - - 13,347 13,464
Over Ten Years - - 2,698 2,740
------------ --------- ------------ ---------
Total Mortgage-Backed Securities - - 16,045 16,204
Other Securities:
Over Ten Years (3) - - 2,997 2,997
------------ --------- ------------ ---------
Total Other Securities - - 2,997 2,997
------------ --------- ------------ ---------
Total Securities $ - $ - $ 48,820 $ 49,682
============ ========= ============ =========
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Represents investments in mortgage-backed securities which are subject to
early repayment.
(3) Represents investment in Federal Reserve Bank and Federal Home Loan Bank
stock and other marketable equity securities.
Table 10a: Weighted Average Yield by Range of Maturities
December 31,
2002 2001
---- ----
One Year or Less 2.41% 2.56%
Over One through Five Years 4.87 5.72
Over Five through Ten Years 4.48 4.95
Over Ten Years (1) 4.46 4.96
(1) Represents adjustable rate, mortgage-backed securities which are
repriceable within one year.
29
Capital Resources
Shareholders' equity at December 31, 2002 was $50.9 million, as compared to
$46.7 million at December 31, 2001. In 2002, the Board of Directors declared
dividends totaling $0.20 per share, consistent with 2001 and 2000. At December
31, 2002, the Company's common stock had a book value of $8.31 per share
compared to $7.64 per share at the end of 2001.
On January 29, 1999 the Company began trading on the NASDAQ National Market
under the symbol "CNBB" after issuing 1,250,000 shares of common stock in an
initial public offering at $10.25 per common share. Proceeds from the offering,
net of underwriting discount and expenses, totaled $11.4 million, which were
used to support expansion plans and for general corporate purposes.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy guidelines
the Company must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures as defined by regulation and established to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios of
Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets. If such minimum amounts and ratios are met, the Bank is
considered "adequately capitalized." If a bank exceeds the requirements of
"adequately capitalized" and meets even more stringent minimum standards, it is
considered to be "well capitalized." As of December 31, 2002, the Bank meets all
capital adequacy requirements to which it is subject.
At December 31, 2002, the Company's Tier 1 capital, total risk-based
capital and Tier 1 leverage ratios were 7.4%, 8.5% and 6.3%, respectively.
Selected capital ratios at year end 2002 as compared to 2001 are shown in Table
11.
Table 11: Capital Ratios
Adequately
December 31, Well Capitalized Capitalized
2002 2001 Requirements Minimums
---- ---- ------------ --------
Risk Based Capital Ratios:
Tier 1 Capital Ratio 7.4% 8.0% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 8.5% 9.0% 10.0% 8.0%
Tier 1 Leverage Ratio 6.3% 6.5% 5.0% 4.0%
30
Quarterly Financial Information
Table 12 sets forth, for the periods indicated, certain consolidated 2002
and 2001 quarterly financial information of the Company. Table 13 includes
average balances, yields and rates for each of the last five quarters. This
information is derived from the Company's unaudited financial statements which
include, in the opinion of management, all normal recurring adjustments which
management considers necessary for a fair presentation of the results for such
periods. The results for any quarter are not necessarily indicative of results
for any future period.
Table 12: Selected Quarterly Data
2002 2001
-------------------------------------------- -------------------------------------------
(dollars in thousands, except per share data)
- ---------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
-- -- -- -- -- -- -- --
Summary of Operations:
Net interest income $ 6,727 $ 6,768 $ 6,400 $ 5,857 $ 5,653 $ 5,332 $ 5,101 $ 4,702
Provision for loan loss (750) (600) (525 (500) (600) (550) (500) (400)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan loss 5,977 6,168 5,875 5,357 5,053 4,782 4,601 4,302
Other income (excluding securities
transactions) 1,657 1,552 1,496 1,404 1,676 1,372 1,437 1,019
Securities gains, net 191 - 4 - 129 - - -
Other expenses (5,338) (5,355) (5,304 (5,159) (5,518) (5,197) (4,733) (4,388)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax expense 2,487 2,365 2,071 1,602 1,340 957 1,305 933
Income tax expense (908) (888) (738 (607) (476) (333) (462) (323)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $ 1,579 $ 1,477 $ 1,333 $ 995 $ 864 $ 624 $ 843 $ 610
========= ========= ========= ========= ========= ========= ========= =========
Per Common Share:
Basic earnings per common share $ 0.26 $ 0.24 $ 0.22 $ 0.16 $ 0.14 $ 0.10 $ 0.14 $ 0.10
Diluted earnings per common share 0.25 0.24 0.21 0.16 0.14 0.10 0.14 0.10
Dividends declared 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Book value 8.31 8.12 7.93 7.75 7.64 7.61 7.53 7.43
Market price
High 16.34 12.24 12.25 10.12 10.31 12.61 13.63 15.00
Low 11.60 10.70 9.66 9.35 9.11 9.00 10.35 8.00
Close 15.89 11.84 11.35 9.80 10.00 9.65 12.95 13.94
Balance Sheet Data (end of quarter):
Assets $ 730,674 $ 686,860 $ 660,943 $ 624,340 $ 612,021 $ 601,792 $ 576,959 $ 502,329
Loans, net 599,211 567,722 549,242 514,530 506,442 493,461 463,101 405,788
Deposits 648,636 613,030 587,533 549,648 532,891 522,754 489,476 400,028
Shareholders' Equity 50,921 49,587 48,352 47,262 46,669 46,242 45,911 45,308
31
Table 13: Quarterly Average Balances, Yields and Rates
Fourth Quarter 2002 Third Quarter 2002 Second Quarter 2002
---------------------------- ---------------------------- ----------------------------
Interest Interest Interest
Average Income or Average Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS:
Federal Funds Sold $ 5,768 $ 19 1.31% $ 2,572 $ 11 1.70% $ 7,290 $ 29 1.60%
Investment Securities Available for Sale 48,389 492 4.03 51,388 552 4.26 37,286 411 4.42
Investment Securities Held to Maturity 344 4 4.61 1,620 24 5.88 1,901 30 6.33
Loans (1) 591,981 10,256 6.87 566,236 10,119 7.09 540,361 9,648 7.16
Interest Bearing Deposits 11,088 45 1.61 1,942 10 2.04 666 4 2.41
--------- ------- ---- -------- ------- ---- -------- ------ ----
TOTAL EARNING ASSETS 657,570 10,816 6.53 623,758 10,716 6.82 587,504 10,122 6.91
All Other Assets 57,547 53,927 53,830
--------- -------- --------
TOTAL ASSETS $ 715,117 $677,685 $641,334
========= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $ 207,773 927 1.77 $200,605 924 1.83 $187,711 817 1.75
Savings 22,241 33 0.59 22,323 42 0.75 22,043 41 0.75
Time Deposits 322,461 2,930 3.60 297,245 2,767 3.69 275,859 2,654 3.86
Federal Funds Purchased and
Repurchase Agreements 10,831 33 1.21 12,803 50 1.55 13,026 47 1.45
Short Term Borrowings 139 1 2.85 0 0 0.00 0 0 0.00
Other Borrowings (2) 10,000 165 6.55 10,000 165 6.55 10,000 163 6.54
--------- ------- ---- -------- ------- ---- -------- ------ ----
TOTAL INTEREST BEARING
LIABILITIES 573,445 4,089 2.83 542,976 3,948 2.88 508,639 3,722 2.94
Demand Deposits 85,651 80,029 79,987
Other Liabilities 5,587 5,389 4,716
Shareholders' Equity 50,434 49,291 47,992
--------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 715,117 $677,685 $641,334
========= ======== ========
---- ---- ----
INTEREST SPREAD (3) 3.70% 3.94% 3.97%
==== ==== ====
------- ------- ------
NET INTEREST INCOME $ 6,727 $ 6,768 $6,400
======= ======= ======
NET INTEREST MARGIN (4) 4.06% 4.30% 4.37%
==== ==== ====
- ----------
(1) Interest income on average loans includes loan fee recognition of $114,000,
$165,000 and $93,000 in the fourth, third and second quarter of 2002
respectively. Nonperforming loans are included in the average loan balance.
Income on such nonperforming loans is recognized on a cash basis.
(2) The interest expense and average rate on other borrowings includes the
impact of an interest rate swap that was entered into as a hedge of
interest rate risk associated with the underlying term debt in October
2001. Under the terms of the interest rate swap, the Company pays a fixed
rate of 6.45% and receives a floating rate of interest of 3-month Libor
plus 170 basis points. Interest on the swap and term debt is calculated
using a 360-day year.
(3) Represents the average rate earned minus average rate paid.
(4) Represents net interest income divided by total earning assets.
32
Table 13: Quarterly Average Balances, Yields and Rates
(dollars in thousands)
First Quarter 2002 Fourth Quarter 2001
----------------------------------- ---------------------------------------
Interest Interest
Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate
---------- ---------- ------- ----------- ---------- -------
ASSETS:
Federal Funds Sold $ 3,154 $ 13 1.67% $ 1,572 $ 8 2.02%
Investment Securities Available
for Sale 38,685 436 4.57 33,538 425 5.03
Investment Securities Held to
Maturity 2,832 41 5.87 5,149 79 6.09
Loans (1) 514,332 9,252 7.30 508,350 9,706 7.57
Interest Bearing Deposits 439 2 1.85 563 4 2.82
---------- ---------- ---- ----------- ---------- ----
TOTAL EARNING ASSETS 559,442 9,744 7.06 549,172 10,222 7.38
All Other Assets 55,482 62,070
---------- -----------
TOTAL ASSETS $ 614,924 $ 611,242
========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $ 171,855 763 1.80 $ 172,122 881 2.03
Savings 21,004 39 0.75 20,157 38 0.75
Time Deposits 268,598 2,863 4.32 265,788 3,394 5.07
Federal Funds Purchased and
Repurchase Agreements 16,100 61 1.54 14,263 72 2.00
Short Term Borrowings 0 0 0.00 1,902 16 3.34
Other Borrowings (2) 10,000 161 6.53 9,967 168 6.69
---------- ---------- ---- ----------- ---------- ----
TOTAL INTEREST BEARING
LIABILITIES 487,557 3,887 3.23 484,199 4,569 3.74
Demand Deposits 75,430 75,417
Other Liabilities 4,374 4,972
Shareholders' Equity 47,563 46,654
---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 614,924 $ 611,242
========== ===========
---- ----
INTEREST SPREAD (3) 3.83% 3.64%
==== ====
---------- ----------
NET INTEREST INCOME $ 5,857 $ 5,653
========== ==========
NET INTEREST MARGIN (4) 4.25% 4.08%
==== ====
- ----------
(1) Interest income on average loans includes loan fee recognition of $122,000
and $175,000 in the first quarter of 2002 and the fourth quarter of 2001
respectively. Nonperforming loans are included in the average loan balance.
Income on such nonperforming loans is recognized on a cash basis.
(2) The interest expense and average rate on other borrowings includes the
impact of an interest rate swap that was entered into as a hedge of
interest rate risk associated with the underlying term debt in October
2001. Under the terms of the interest rate swap, the Company pays a fixed
rate of 6.45% and receives a floating rate of interest of 3-month Libor
plus 170 basis points. Interest on the swap and term debt is calculated
using a 360-day year.
(3) Represents the average rate earned minus average rate paid.
(4) Represents net interest income divided by total earning assets.
33
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
On January 28, 1997, the SEC adopted amendments to Regulation S-K,
Regulation S-X, and various forms (Securities Act Release No. 7386) to clarify
and expand existing requirements for disclosures about derivatives and market
risks inherent in derivatives and other financial instruments. The Company's
primary market risk exposure category is interest rate risk. The Company is
exposed to interest rate risk to the extent there is a mismatch between the
interest rate repricing on its assets and liabilities. Changes in market
interest rates will also affect the market value of a significant portion of the
Company's assets and liabilities. The Company manages this risk through regular
analysis of its gap and liquidity positions. Included in the review is an
internal analysis of the possible impact on net interest income and market value
of equity due to assumed changes in interest rates. 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. This balance generally maintained through a monitoring of balance
sheet maturity and repricing mix. As noted below, at December 31, 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 December
31, 2002 and 2001 was approximately ($691,000) and $9,000, respectively. The
swap is being accounted for as a cash flow hedge of the variable interest
payments under the $10 million term debt. For additional information, see Notes
2 and 8 of Notes to Consolidated Financial Statements.
Non-derivative financial instruments that have market risk are included in
Table 3: "Rate Sensitivity Analysis". These instruments are shown by maturity,
separated by fixed and variable interest rates. The estimated fair value of each
instrument category is also shown in the table. While these estimates of fair
value are based on management's judgment of the most appropriate factors, there
is no assurance that, were the Company to have disposed of such instruments at
December 31, 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 December 31, 2002 would not
necessarily be considered to apply at subsequent dates.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the
portrayal of the Company's financial condition and requires management's most
difficult, subjective or complex judgments. The circumstances that make these
judgments difficult, subjective or complex have to do with the need to make
estimates about the effect of matters that are inherently uncertain.
Based on this definition, the Company's primary critical accounting policy
is the establishment and maintenance of an allowance for loan loss. The
allowance for loan loss is established through a provision for loan loss charged
to expense. Loans are charged against the allowance for loan loss when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
inherent losses on existing loans that may become uncollectible based on
evaluations of the collectibility of the loans. The evaluations take into
consideration such objective factors as changes in the nature and volume of the
loan portfolio 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, because 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,
34
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 in 2001, 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 accounts acquired leave the Company faster than
anticipated, the amount of the core deposit intangible that is amortized each
period could increase significantly, thus shortening its useful life. Through
December 31, 2002, the performance of acquired accounts did not differ
materially from expectations.
FINANCIAL STATEMENTS
The consolidated financial statements as of December 31, 2002 and the year
then ended have been audited by the Company's independent certified public
accountants, PricewaterhouseCoopers LLP. Their report on the Company's
consolidated financial statements is also included therein.
35
CNB Florida Bancshares, Inc.
and Subsidiary
Consolidated Financial Statements
36
REPORT OF MANAGEMENT
The management of CNB Florida Bancshares, Inc. and its subsidiary (the
"Company") is responsible for the preparation, integrity and objectivity of the
consolidated financial statements of the Company. The consolidated financial
statements and notes have been prepared by the Company in accordance with
accounting principles generally accepted in the United States of America and, in
the judgment of management, present fairly the Company's financial position and
results of operations. The financial information contained elsewhere in this
report is consistent with that in the consolidated financial statements. The
financial statements and other financial information in this report include
amounts that are based on management's best estimates and judgments giving due
consideration to materiality.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and recorded properly to
permit the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America.
Management recognizes that even a highly effective internal control system has
inherent risks, including the possibility of human error and the circumvention
or overriding of controls, and that the effectiveness of an internal control
system can change with circumstances. However, management believes that the
internal control system provides reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements
are prevented or would be detected on a timely basis and corrected through the
normal course of business. The Company assessed its internal control system as
of December 31, 2002 in relation to criteria for effective internal control over
financial reporting described in "Internal Control-Integrated Framework" issued
by the Committee of Sponsoring Organizations of the Treadway Commission. As of
December 31, 2002, management believes that the internal controls are in place
and operating effectively.
The Internal Audit function of the Company reviews, evaluates, monitors and
makes recommendations on both administrative and accounting control and acts as
an integral, but independent, part of the system of internal controls.
The independent certified public accountants were engaged to perform an
independent audit of the consolidated financial statements. In determining the
nature and extent of their auditing procedures, they have evaluated the
Company's accounting policies and procedures and the effectiveness of the
related internal control system. An independent audit provides an objective
review of management's responsibility to report operating results and financial
condition. Their report appears on the following page.
The Board of Directors discharges its responsibility for the Company's
consolidated financial statements through its Audit Committee. The Audit
Committee meets periodically with the independent certified public accountants,
internal auditors and management. Both the independent certified public
accountants and internal auditors have direct access to the Audit Committee to
discuss the scope and results of their work, the adequacy of internal accounting
controls and the quality of financial reporting.
/s/ K.C. Trowell
- ----------------
Chairman of the Board and
Chief Executive Officer
/s/ G. Thomas Frankland
- -----------------------
Executive Vice President and
Chief Financial Officer
37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of CNB Florida Bancshares, Inc.:
In our opinion, the accompanying consolidated statement of financial condition
and the related consolidated statements of income, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of CNB
Florida Bancshares, Inc. and its subsidiary (the "Company") at December 31, 2002
and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of December 31, 2001, and for each of the two years in the period
ended December 31, 2001 were audited by other independent certified public
accountants who have ceased operations. Those independent certified public
accountants expressed an unqualified opinion on those financial statements in
their report dated January 23, 2002.
PricewaterhouseCoopers LLP
Jacksonville, Florida
January 27, 2003
38
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP (ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND ANDERSEN DID
NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS INCLUDED IN
THIS FORM 10-K) INTO ANY OF THE COMPANY'S REGISTRATION STATEMENTS.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To CNB Florida Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of CNB FLORIDA BANCSHARES, INC. (a Florida corporation) AND SUBSIDIARY as of
December 31, 2001 and 2000 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CNB Florida Bancshares, Inc.
and Subsidiary as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
January 23, 2002
39
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2002 2001
---- ----
(dollars in thousands)
ASSETS
Cash and due from banks $ 15,986 $ 17,993
Federal funds sold 5,400 2,100
Interest-bearing deposits in other banks 12,215 584
-------- --------
Total cash and cash equivalents 33,601 20,677
Investment securities available for sale 49,682 33,003
Investment securities held to maturity (market value of $0 and $4,057) - 4,060
Loans, net of allowance for loan loss of $6,574 and $5,205 599,211 506,442
Loans held for sale 10,893 9,908
Premises and equipment, net 25,086 26,167
Intangible assets, net 6,056 6,802
Other assets 6,145 4,962
-------- --------
$730,674 $612,021
======== ========
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 80,065 $ 72,859
Savings, NOW and money market 236,284 191,495
Time under $100,000 172,671 152,986
Time $100,000 and over 159,616 115,551
-------- --------
Total deposits 648,636 532,891
Securities sold under repurchase agreements and federal funds purchased 14,446 18,148
Other borrowings 11,000 10,000
Other liabilities 5,671 4,313
-------- --------
Total liabilities 679,753 565,352
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 20)
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,
6,125,500 shares issued and outstanding for 2002 and
6,106,453 shares issued and outstanding for 2001 61 61
Additional paid-in capital 30,840 30,533
Retained earnings 19,912 15,749
Accumulated other comprehensive income, net of taxes 108 326
-------- --------
Total shareholders' equity 50,921 46,669
-------- --------
Total liabilities and shareholders' equity $730,674 $612,021
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2002 2001 2000
(dollars and shares in thousands)
INTEREST INCOME
Interest and fees on loans $39,275 $38,055 $29,112
Interest on investment securities available for sale 1,891 1,864 2,110
Interest on investment securities held to maturity 99 384 572
Interest on federal funds sold 73 102 208
Interest on interest-bearing deposits 60 12 59
------- ------- -------
Total interest income 41,398 40,417 32,061
------- ------- -------
INTEREST EXPENSE
Interest on deposits 14,800 17,751 12,988
Interest on repurchase agreements and federal funds purchased 191 552 572
Interest on other borrowings 655 1,326 1,176
------- ------- -------
Total interest expense 15,646 19,629 14,736
------- ------- -------
NET INTEREST INCOME 25,752 20,788 17,325
PROVISION FOR LOAN LOSS 2,375 2,050 1,350
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 23,377 18,738 15,975
------- ------- -------
NON-INTEREST INCOME
Service charges 3,273 2,974 2,446
Secondary market mortgage sales 2,123 1,917 345
Other fees and charges 713 613 547
Gain on sale of securities 195 129 -
------- ------- -------
Total non-interest income 6,304 5,633 3,338
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 11,095 10,252 8,539
Occupancy and equipment expenses 3,427 3,113 2,220
Other operating expenses 6,634 6,471 4,722
------- ------- -------
Total non-interest expense 21,156 19,836 15,481
------- ------- -------
INCOME BEFORE INCOME TAXES 8,525 4,535 3,832
INCOME TAXES 3,141 1,594 1,325
------- ------- -------
NET INCOME $ 5,384 $ 2,941 $ 2,507
======= ======= =======
EARNINGS PER SHARE
Basic earnings per share $ 0.88 $ 0.48 $ 0.41
======= ======= =======
Basic weighted average shares outstanding 6,104 6,095 6,095
======= ======= =======
Diluted earnings per share $ 0.87 $ 0.48 $ 0.41
======= ======= =======
Diluted weighted average shares outstanding 6,216 6,188 6,134
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
41
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumulated
Other
(dollars and shares in thousands) Common Stock Additional Comprehensive Total
------------ Paid-In Retained Income (Loss), Shareholders'
Shares Value Capital Earnings Net of Taxes Equity
------ ----- ------- -------- ------------ ------
BALANCE, December 31, 1999 6,116 $ 61 $ 30,805 $ 12,746 $ (537) $ 43,075
Comprehensive income:
Net income 2,507
Change in unrealized gain on investment
securities available for sale, net of $300 taxes 504
Total comprehensive income 3,011
Cash dividends ($0.20 per share) (1,226) (1,226)
Exercise of stock options 33 113 113
Repurchase of common stock (50) (395) (395)
Issuance of restricted stock 58 58
--- ---- ----- ----- --------- -------- ------ ----------
BALANCE, December 31, 2000 6,099 61 30,581 14,027 (33) 44,636
Comprehensive income:
Net income 2,941
Change in unrealized gain on investment
securities available for sale, net of $210 taxes 353
Change in fair value of cash flow hedges, net
of $3 taxes 6
Total comprehensive income 3,300
Cash dividends ($0.20 per share) (1,219) (1,219)
Exercise of stock options 31 166 166
Repurchase of common stock (24) (234) (234)
Issuance of restricted stock 20 20
--- ---- ----- ----- --------- -------- ------ ----------
BALANCE, December 31, 2001 6,106 61 30,533 15,749 326 46,669
Comprehensive income:
Net income 5,384
Change in unrealized gain on investment
securities available for sale, net of $131 taxes 221
Change in fair value of cash flow hedges, net
of $(261) taxes (439)
Total comprehensive income 5,166
Cash dividends ($0.20 per share) (1,221) (1,221)
Tax benefit from exercise of stock options 161 161
Exercise of stock options 30 246 246
Repurchase of common stock (10) (100) (100)
----- ----- --------- -------- ------ ----------
BALANCE, December 31, 2002 6,126 $ 61 $ 30,840 $ 19,912 $ 108 $ 50,921
===== ===== ========= ======== ====== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
42
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
---- ---- ----
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,384 $ 2,941 $ 2,507
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sale of securities available for sale (195) (129) -
Depreciation and amortization 2,507 2,046 1,176
Provision for loan loss 2,375 2,050 1,350
Investment securities amortization (accretion), net 267 (6) 13
Non-cash compensation - 20 58
Net (origination of) proceeds from loans held for sale (985) (962) 8,947
Deferred income tax benefit (361) (715) (370)
Changes in assets and liabilities:
Other assets (1,229) (1,469) 928
Other liabilities 1,357 194 1,394
--------- --------- ---------
Net cash provided by operating activities 9,120 16,276 3,697
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (95,145) (137,959) (114,126)
Purchases of investment securities available for sale (47,069) (42,840) (1,068)
Proceeds from sales of investment securities available for sale 15,191 1,726 -
Proceeds from called investment securities available for sale 8,140 14,100 472
Proceeds from called investment securities held to maturity 4,060 3,395 1,245
Proceeds from maturities of investment securities available for sale 7,339 27,946 3,287
Proceeds from maturities of investment securities held to maturity - 3 1,852
Purchases of premises and equipment (680) (3,356) (9,035)
Branches acquired from Republic Bank - 41,921 -
--------- --------- ---------
Net cash used in investing activities (108,164) (95,064) (117,373)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 115,745 102,848 79,483
Net (decrease) increase in securities sold under repurchase agreements
and federal funds purchased (3,702) (2,994) 9,079
Net (decrease) increase in FHLB advances - (30,000) 30,000
Proceeds from other borrowings 1,000 10,000 -
Cash dividends (1,221) (1,219) (1,226)
Repurchase of common stock (100) (234) (395)
Proceeds from exercise of stock options 246 166 113
--------- --------- ---------
Net cash provided by financing activities 111,968 78,567 117,054
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,924 (221) 3,378
CASH AND CASH EQUIVALENTS, beginning of year 20,677 20,898 17,520
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 33,601 $ 20,677 $ 20,898
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
43
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization and Nature of Operations
CNB Florida Bancshares, Inc. (the "Company") is a registered bank holding
company incorporated in Florida. The Company operates a wholly owned banking
subsidiary, CNB National Bank (the "Bank"), which is chartered as a national
bank.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation. The Company follows generally accepted
accounting principles and reporting practices applicable to the banking
industry in the United States. Certain amounts relating to 2001 and 2000
have been reclassified to conform with current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash and cash
equivalents to include cash on hand, amounts due from banks, interest
bearing deposits in other banks and federal funds sold. The Company
maintains its due from banks with correspondent banking relationships.
Investment Securities
Available for Sale
Securities available for sale represent investment securities that are
used for asset/liability management, liquidity and other funds
management purposes. These securities may be sold in response to
changes in interest rate risk, prepayment risk or other similar
economic factors. These securities are recorded at fair value, with
unrealized gains and losses, net of deferred income taxes, recorded in
the accumulated other comprehensive income component of shareholders'
equity. Fair value is estimated based on dealer quotes.
Held to Maturity
Securities held to maturity represent investment securities where the
Company has both the intent and ability to hold the securities to
maturity. These securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
Amortization and accretion of premiums and discounts are recognized as
adjustments to interest income. Realized gains and losses are recognized
using the specific identification method. Investment securities available
for sale are periodically reviewed for other than temporary declines in
value. If such a decline is determined to have occurred, the amount of the
44
decline is transferred from other comprehensive income and immediately
recorded in current period earnings. There have been no other-than-temporary
impairment losses recorded during the years ended December 31, 2002, 2001
and 2000.
Loans, Loan Fees and Interest Income
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan loss. Interest on substantially all loans other than certain
installment loans is calculated by using the simple interest method on daily
balances of the principal amounts outstanding.
Loan fees, net of loan origination costs, are deferred and amortized as
yield adjustments over the respective loan terms using a method that does
not differ significantly from the interest method. For 2002, 2001 and 2000,
net loan fees included in interest income amounted to approximately
$494,000, $979,000 and $969,000, respectively.
Allowance for Loan Loss
The allowance for loan loss is an amount that management believes will be
adequate to absorb inherent losses on existing loans that may become
uncollectible based on evaluations of the collectibility of the loans. The
allowance for loan loss is established through a provision for loan loss
charged to expense. Loans are charged against the allowance for loan loss
when management believes that the collectibility of the principal is
unlikely. The evaluation of collectibility takes into consideration such
objective factors as changes in the nature and volume of the loan portfolio
and historical loss experience. The evaluation also considers certain
subjective factors such as overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrowers'
ability to pay. The determination of the allowance for loan loss considers
both specifically identified impaired loans, as well as expected losses on
large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. The level of the allowance for loan loss is also
impacted by increases and decreases in loans outstanding, since either more
or less allowance is required as the amount of the Company's credit exposure
changes. To the extent actual loan losses differ materially from
management's estimate of these subjective factors, loan growth/run-off
accelerates or the mix of loan types changes, the level of the provision for
loan loss, and related allowance, can and will fluctuate.
Accrual of interest is discontinued on loans that are 90 days or more past
due, unless substantially collateralized and in the process of collection,
or sooner if, in the opinion of management, the borrower's financial
condition is such that collection of principal or interest is doubtful.
Loans Held for Sale
Loans held for sale include residential mortgage loans originated with the
intent to sell in the secondary market. Loans held for sale are carried at
the lower of cost or market value. Any amount by which cost exceeds market
value is accounted for as a valuation allowance, with changes in the
valuation allowance reflected in earnings. There were no valuation
allowances at December 31, 2002 and 2001.
45
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which ranged from three to forty years.
Maintenance and repairs are charged to expense as incurred. Gains and losses
on dispositions are reflected in income.
Long-lived assets are evaluated regularly for other-than-temporary
impairment. If circumstances suggest that their carrying value may not be
recoverable, an impairment test is performed comparing the carrying value of
the asset to estimated undiscounted cash flows. If assets are considered to
be impaired, a charge is recorded to the extent that fair value is less than
carrying value.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. After foreclosure, management periodically performs
valuations and the real estate is carried at the lower of carrying amount or
fair value, less estimated cost to sell.
Intangibles
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangibles ("SFAS 142") on January 1,
2002. SFAS 142 requires, among other things, the discontinuance of goodwill
amortization and includes provisions for reassessment of the useful lives of
existing intangibles and the identification of reporting units for purposes
of assessing potential future impairments of goodwill. SFAS 142 also
required the Company to complete a two-step transitional goodwill impairment
test. The Company completed the transitional goodwill impairment test during
the first quarter of 2002 and determined that goodwill at transition was not
impaired.
At both December 31, 2002 and 2001, the Company had goodwill with a carrying
value of $646,000. Beginning January 1, 2002, in accordance with SFAS 142,
goodwill is no longer being amortized, but is instead evaluated for
impairment at least annually. Amortization of goodwill was approximately
$70,000 for 2001 and 2000. Absent the impact of goodwill amortization in
2001 and 2000, net income, basic earnings per share and diluted earnings per
share would have been $3,011,000, $0.49, $0.49 and $2,577,000, $0.42, $0.42,
for the years ended December 31, 2001 and 2000, respectively.
The Company's other intangible asset consists of core deposit intangibles
that are being amortized over their estimated useful life of 10 years.
Amortization expense related to core deposit intangibles was $746,000,
$473,000 and $109,000 for 2002, 2001 and 2000 respectively. Estimated
amortization expense on core deposit intangibles for the years ended
December 31, 2003 through December 31, 2007 are as follows:
2003 $712,000
2004 638,000
2005 638,000
2006 634,000
2007 631,000
46
The gross carrying value and accumulated amortization related to core
deposit intangibles at December 31, 2002 was $7.3 million and $1.9 million,
respectively. The gross carrying value and accumulated amortization of core
deposits was $7.6 million and $1.4 million at December 31, 2001,
respectively. Periodically, the Company reviews its core deposit intangibles
for events or changes in circumstances that may indicate that the carrying
amounts of the assets are not recoverable. There were no impairment losses
on core deposits during the years ended December 31, 2002, 2001 and 2000.
Interest Rate Contract
As more fully described in Note 8, "Other Borrowings," during 2001 the
Company entered into a pay-fixed interest rate contract as a hedge of
interest rate risk related to a term loan entered into with a bank. The
interest rate contract is accounted for under the provision of Statement of
Financial Accounting Standards No. 133, Accounting for Derivatives and
Hedging Activities, which requires all derivatives to be stated at fair
value and was adopted by the Company on January 1, 2001. Because the Company
was not a party to derivative contracts at adoption of this standard, the
adoption did not have a material impact of the financial position or results
of operations of the Company. Upon entering into the interest rate swap, the
contract was designated as a cash flow hedge of the forecasted variable
interest payments to be made under the term loan. The interest rate swap is
recorded in the financial statements at fair value, with changes in value
reflected in other comprehensive income. Unrealized gains and losses on the
interest rate contract are reclassified from other comprehensive income to
interest expense when the hedged transaction impacts earnings. The
effectiveness of the hedging relationship is evaluated at least every three
months. There was no hedge ineffectiveness for the years ended December 31,
2002 and 2001. The interest rate contract had an unrealized (loss) gain, net
of taxes, at December 31, 2002 and 2001 of ($433,000) and $6,000,
respectively. Of the unrealized loss at December 31, 2002, the Company
expects to reclassify approximately $236,000 of pre-tax expense from other
comprehensive income to interest expense over the next twelve months. This
estimate is based on market interest rates on December 31, 2002 and is
subject to variability to the extent interest rates fluctuate over this time
period.
Stock Based Compensation
The Company has long-term incentive plans that provide stock-based awards,
including stock options to certain key employees. The Company applies the
provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for its stock option and award
plans and has adopted the disclosure-only option under Statement of
Financial Accounting Standards, ("SFAS") No. 123, Accounting for Stock-Based
Compensation. If the Company had adopted the accounting provisions of SFAS
123 and recognized expense for the fair value of employee stock options
granted in 2002, 2001 and 2000, over the vesting life of the options, pro
forma net income would be as indicated below (dollars in thousands, except
per share data):
As Reported Pro Forma
------------------------------------ ------------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
$ 5,384 $ 2,941 $ 2,507 $ 5,151 $ 2,818 $ 2,407
Net income .....................................
Basic earnings per common share ................ $ 0.88 $ 0.48 $ 0.41 $ 0.84 $ 0.46 $ 0.39
Diluted earnings per common share .............. $ 0.87 $ 0.48 $ 0.41 $ 0.83 $ 0.46 $ 0.39
47
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the grant date using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the
fair value of traded options, which have different characteristics than
employee stock options, and changes to the subjective assumptions used in
the model can result in materially different fair value estimates. The
weighted-average grant date fair values of the options granted during 2002,
2001 and 2000 were based on the following assumptions:
Risk-Free Dividend
Interest Rates Yield
------------------------- -------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Performance-Based Incentive and other stock
option plans ........................... 5.13% 3.75% 6.52% 1.88% 2.08% 2.50%
Expected Lives Volatility
------------------------- -------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Performance-Based Incentive and other stock
option plans ........................... 6 years 6 years 6 years 38% 36% 30%
Compensation expense under the fair value-based method is recognized over
the vesting period of the related stock options. Accordingly, the pro forma
results of applying SFAS No. 123 in 2002, 2001 and 2000 may not be
indicative of future amounts.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. This method requires the recognition of deferred tax assets and
liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
The Company and the Bank file consolidated federal and state income tax
returns. Under a tax-sharing arrangement, income tax charges or credits are
generally allocated to the Company and the Bank on the basis of their
respective taxable income or loss that is included in the consolidated
income tax return, as determined by the separate return method.
48
Earnings Per Share
Basic earnings per share is calculated based on the weighted average number
of shares of common stock outstanding. Diluted earnings per share is
calculated based on the weighted average number of shares of common stock
and common stock equivalents outstanding. Common stock equivalents are
determined using the treasury method for diluted shares outstanding. The
difference between diluted and basic shares outstanding is common stock
equivalents from stock options outstanding during the years ended December
31, 2002, 2001 and 2000.
Supplemental Cash Flow Information
For purposes of reporting cash flows, the Company considers cash and cash
equivalents to include cash on hand, amounts due from banks,
interest-bearing deposits in other banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods and all cash
equivalents have an original maturity of 90 days or less. Cash paid for
interest was approximately $16,125,000, $19,029,000 and $13,330,000 during
2002, 2001 and 2000, respectively, and cash paid for income taxes was
approximately $3,388,000, $2,025,000 and $1,759,000 during 2002, 2001 and
2000, respectively.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("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 supercedes 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 were adopted by the Company on January 1, 2002 and 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, Amendments of SFAS 13, and Technical Corrections as of May
2002 ("SFAS 145"). SFAS 145 rescinds SFAS 4, 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
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 Certain Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses
49
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit and 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 adoption of SFAS
147 did not have a significant impact on the Company's consolidated
financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. When adopted, the
initial recognition and initial measurement provisions of FIN 45 are not
expected to have a significant impact on the Company's consolidated
financial statements. The adoption of the disclosure requirements did not
have a significant impact on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123 ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition provisions of SFAS 148 are
effective for financial statements for fiscal years ending after December
15, 2002. The disclosure provisions of SFAS 148 are effective for financial
50
reports containing condensed financial statements for interim periods
beginning after December 15, 2002. For information related to the Company's
accounting for its stock option award plans and for the related disclosures
required by SFAS 123, see Stock Based Compensation above. The Company will
begin reporting quarterly information with respect to the impact of
stock-based compensation on reported and pro forma earnings beginning in the
first quarter of 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable-Interest Entities - an Interpretation of ARB No. 51 ("FIN 46").
FIN 46 addresses consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics: (1) the
equity investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, which is provided through other interests that will absorb some or
all of the expected losses of the entity and (2) the equity investors lack
one or more of the following essential characteristics of a controlling
financial interest:
o The direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights.
o The obligation to absorb the expected losses of the entity if they
occur, which makes it possible for the entity to finance its activities.
o The right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the expected
losses.
This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which
an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN 46 is not expected to
have a significant impact on the Company' s consolidated financial
statements.
51
3. INVESTMENT SECURITIES
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 2002, 2001 and 2000 are as follows (in thousands):
2002 U.S. U.S. State, Mortgage-
Treasury Government County, and Backed
Securities Agencies Municipal Securities Other Total
---------- -------- --------- ---------- ----- -----
Amortized cost ..................... $ 4,008 $24,027 $ 1,743 $16,045 $ 2,997 $48,820
Gross unrealized:
Gains .............................. 8 653 42 159 - 862
Losses ............................. - - - - - -
------- ------- ------- ------- ------- -------
Estimated fair value ............... $ 4,016 $24,680 $ 1,785 $16,204 $ 2,997 $49,682
======= ======= ======= ======= ======= =======
2001 U.S. State, Mortgage-
Government County, and Backed
Agencies Municipal Securities Other Total
-------- --------- ---------- ----- -----
Amortized cost ..................... $20,870 $ 935 $ 6,841 $ 3,847 $32,493
Gross unrealized:
Gains .............................. 580 37 13 - 630
Losses ............................. - - (120) - (120)
------- ------- ------- ------- -------
Estimated fair value ............... $21,450 $ 972 $ 6,734 $ 3,847 $33,003
======= ======= ======= ======= =======
2000
U.S. U.S. State, Mortgage-
Treasury Government County, and Backed
Securities Agencies Municipal Securities Other Total
---------- -------- --------- ---------- ----- -----
Amortized cost ................... $ 7,494 $20,000 $ 1,025 $ 1,846 $ 2,924 $33,289
Gross unrealized:
Gains ............................ 21 - 22 4 66 113
Losses ........................... - (166) - - - (166)
------- ------- ------- ------- ------- -------
Estimated fair value ............. $ 7,515 $19,834 $ 1,047 $ 1,850 $ 2,990 $33,236
======= ======= ======= ======= ======= =======
52
Amortized cost and estimated fair value of investment securities held to
maturity at December 31, 2001 and 2000 is follows (in thousands):
2001 U.S.
Government
Agencies Total
-------- -----
Amortized cost ........................... $ 4,060 $ 4,060
Gross unrealized:
Gains .................................... - -
Losses ................................... (3) (3)
------- -------
Estimated fair value ..................... $ 4,057 $ 4,057
======= =======
2000 U.S. Mortgage-
Government Backed
Agencies Securities Total
-------- ---------- -----
Amortized cost .................. $ 7,457 $ 3 $ 7,460
Gross unrealized:
Gains ........................... - - -
Losses .......................... (2) - (2)
------- ------- -------
Estimated fair value ............ $ 7,455 $ 3 $ 7,458
======= ======= =======
Interest income earned on tax-exempt securities in 2002, 2001 and 2000 was
approximately $40,000, $48,000 and $52,000, respectively. Dividends of
approximately $171,000, $226,000 and $146,000 on stock of the Federal
Reserve Bank and the Federal Home Loan Bank are included in interest on
investment securities available for sale in 2002, 2001 and 2000,
respectively.
The amortized cost and estimated fair value of securities at December 31,
2002, by contractual maturity, are shown below (in thousands):
Investment Securities
Available for Sale
------------------
Amortized Estimated
Cost Fair Value
---- ----------
Due in:
One year or less ............................ $ 8,064 $ 8,104
After one through five years ................ 19,971 20,592
After five through ten years ................ 608 650
Over ten years .............................. 1,135 1,135
Mortgage-backed securities and others ....... 19,042 19,201
---------- ----------
$ 48,820 $ 49,682
========== ==========
At December 31, 2002, securities with an amortized cost of approximately
$31,123,000 and an estimated fair value of approximately $31,870,000 were
pledged to collateralize public funds, treasury tax and loan deposits, and
repurchase agreements.
53
Gross gains on sales of investment securities available for sale were
$195,000, $129,000 and $0 for each of the years ended December 31, 2002,
2001 and 2000, respectively. There were no gross losses during these
periods, nor were there any sales of investment securities held to maturity.
4. LOANS, ALLOWANCE FOR LOAN LOSS AND NONPERFORMING ASSETS
Loans at December 31, 2002 and 2001 were comprised of the following (in
thousands):
2002 2001
---- ----
Commercial, financial, and agricultural .............................. $ 366,954 $ 280,453
Real estate--construction ............................................ 52,596 41,064
Real estate--mortgage ................................................ 145,815 147,973
Installment and consumer lines ....................................... 40,420 42,157
--------- ---------
Total loans, net of unearned interest and fees .................. 605,785 511,647
Less allowance for loan loss ......................................... (6,574) (5,205)
--------- ---------
Net loans ....................................................... $ 599,211 $ 506,442
========= =========
Activity in the allowance for loan loss was as follows for the years ended
December 31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
---- ---- ----
Balance at beginning of year .................................. $ 5,205 $ 3,670 $ 2,671
Provision ..................................................... 2,375 2,050 1,350
Charge-offs ................................................... (1,232) (875) (524)
Recoveries .................................................... 226 250 173
Republic acquisition .......................................... - 110 -
------- ------- -------
Balance at end of year ........................................ $ 6,574 $ 5,205 $ 3,670
======= ======= =======
Nonaccrual loans totaled approximately $5,611,000 and $1,377,000 at December
31, 2002 and 2001, respectively. Foregone interest, which would have
otherwise been recorded on nonaccrual loans, including those loans that were
nonaccrual at sometime during the year and later paid, reinstated or charged
off, was approximately $402,000, $96,000 and $25,000, in 2002, 2001 and
2000, respectively. In addition to nonaccrual loans, nonperforming assets
include loans past due 90 days and still accruing interest, other real
estate owned related to property acquired by foreclosure in settlement of
debt and repossessed assets. Loans past due 90 days and still accruing
interest were $2,439,000 and $1,271,000 at December 31, 2002 and 2001,
respectively. Other real estate owned and repossessed assets was
approximately $24,000 and $229,000 at December 31, 2002 and 2001,
respectively, and is included in other assets in the accompanying
consolidated statements of financial condition.
54
The Company recognizes income on impaired loans primarily on the cash basis.
Impaired loans are considered to be loans with a probability that the
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Any change in the present value of
expected cash flows is recognized through the allowance for loan loss.
Impaired loan information for the year ended December 31, 2002, 2001 and
2000 is as follows (in thousands):
2002 2001 2000
---- ---- ----
Impaired loans with an allowance ...................................... $6,351 $1,361 $1,041
====== ====== ======
Allowance for impaired loans .......................................... $ 903 $ 204 $ 213
====== ====== ======
Interest income recognized on impaired loans during the year .......... $ 348 $ 66 $ 40
====== ====== ======
The average balance of impaired loans during 2002, 2001 and 2000
approximated $3.2 million, $1.0 million and $1.0 million, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following components at
December 31 (in thousands):
2002 2001
---- ----
Buildings and improvements ................................................ $ 20,130 $ 20,011
Equipment and furnishings ................................................. 8,942 8,475
Land ...................................................................... 5,208 5,224
Construction in progress .................................................. 94 5
-------- --------
34,374 33,715
Less accumulated depreciation and amortization ............................ (9,288) (7,548)
-------- --------
$ 25,086 $ 26,167
======== ========
Depreciation expense was approximately $1,761,000, $1,503,000 and $997,000
for 2002, 2001 and 2000, respectively.
6. DEPOSITS
At December 31, 2002, the scheduled maturities of certificates of deposit
are as follows (in thousands):
2003 ...................................... $227,300
2004 ...................................... 50,641
2005 ...................................... 37,949
2006 ...................................... 13,505
2007 and thereafter ....................... 2,892
--------
$332,287
========
55
Interest expense on deposits was as follows for the years ended December 31
(in thousands):
2002 2001 2000
---- ---- ----
Now ................................... $ 1,543 $ 1,664 $ 1,750
Money market .......................... 1,889 2,235 1,981
Savings ............................... 155 196 238
Certificates of deposit ............... 11,213 13,656 9,019
------- ------- -------
$14,800 $17,751 $12,988
======= ======= =======
7. REPURCHASE AGREEMENTS
The Bank has entered into repurchase agreements with several customers under
which the Bank pledges investment securities owned and under its control as
collateral against the one-day agreements. These transactions do not satisfy
the financial instrument sale criteria outlined under generally accepted
accounting principles. Therefore, the investment securities remain recorded
on the Company's balance sheet, while the related repurchase agreements are
reflected as borrowed funds. The following table outlines the average and
highest amounts outstanding, interest expense and average rate paid on
repurchase agreements for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Average daily balance ................. $11,557,000 $12,284,000 $ 7,666,000
Highest amount outstanding at
any month end ...................... 19,190,000 19,136,000 16,542,000
Interest expense ...................... 158,000 443,000 447,000
Average rate paid ..................... 1.37% 3.61% 5.83%
Average rate paid at year-end ......... 0.97% 1.53% 6.04%
8. OTHER BORROWINGS
During 2001 and 2000 the Bank received funding from Federal Home Loan Bank
(FHLB) advances. The advances were collateralized by a portion of the Bank's
residential mortgage portfolio and the average rate paid in 2001 and 2000 on
the advances was 5.06% and 6.77%, respectively. Interest expense paid on
FHLB advances was approximately $1,061,000 in 2001 and $1,176,000 in 2000.
The highest amount outstanding during 2001 and 2000 was $40,000,000 and
$30,000,000, respectively. There were no balances outstanding at December
31, 2001 and $30,000,000 outstanding at December 31, 2000. The Bank did not
utilize funding from the FHLB during 2002.
In April 2001, the Company entered into a 364-day, $10 million line of
credit with a bank. The contractual agreement provides for interest at
90-day Libor plus 145 basis points and is collateralized by the Company's
investment in CNB National Bank. During 2001, the Company drew down
$7,000,000 under this line and incurred interest expense of $97,000. This
line of credit was modified in October 2001 as discussed below.
In October 2001, the line of credit agreement was modified into two
facilities as follows:
o Facility A: $3,000,000 line of credit maturing June 30, 2002
(subsequently renewed through June 30, 2003). Interest is variable at
90-day Libor plus 145 basis points.
o Facility B: $10,000,000 term loan maturing October 3, 2006. Interest is
variable at 90-day Libor plus 170 basis points and was 3.46% at December
31, 2002. Semi-annual principal payments of $714,286 begin in April
2004, with the remainder due at maturity.
56
In connection with the line of credit agreement, the Company is required to
maintain compliance with certain covenants and restrictions. The following
financial covenants are to be maintained on a quarterly basis and are
calculated at the Bank-level:
o Interest coverage ratio of greater than or equal to 2.00x through
September 30, 2003.
o Debt service coverage ratio of greater than or equal to 0.85x through
September 30, 2002; 1.00x from October 1, 2002 through September 30,
2003; 1.25x from October 1, 2003 through September 30, 2004; and 1.50x
from October 1, 2004 through maturity.
o Ratio of non-performing assets to total loans plus other real estate
owned and repossessed assets of less than or equal to 1.25%.
o Maintenance of tier 1 and total risk based capital ratios that meet the
benchmarks for consideration as a "well-capitalized" institution
(currently 6% and 10%, respectively). Also, maintenance of a leverage
capital ratio of at least 5%.
In addition, the Company is subject to the following restrictions:
o No additional debt is permitted without consent of the lender.
o No increases in dividends paid by the Company to its common shareholders
are permitted without consent of the lender.
Failure to maintain any of these covenants would place the Company in
default of the line of credit agreement. In such a case, absent any waivers
obtained from the lender, all amounts payable could be accelerated and
become due immediately. As of December 31, 2002, the Company was in
compliance with all covenants, except as noted below.
At December 31, 2002, the Bank's ratio of non-performing assets to total
loans plus other real estate owned and repossessed assets totaled 1.33%,
which exceeded the amount stipulated in the agreement of 1.25%. The Bank
obtained a waiver of default with respect to the non-performing assets ratio
requirement for its 2002 fiscal year.
At December 31, 2001, there was $10,000,000 outstanding under Facility B,
consisting of the original $7,000,000 and an additional $3,000,000 received
at the origination date of the term loan. At December 31, 2002, there was
$1,000,000 outstanding on Facility A, with an interest rate of 2.85%. There
were no advances under Facility A during 2001. The Company did not have any
long-term debt outstanding during 2000.
In addition to the amended line of credit agreement, the Company entered
into a $10,000,000 notional pay-fixed interest rate swap with the same bank.
The fixed rate under the interest rate swap is 6.45% and the variable rate
is based on 90-day Libor plus 170 basis points. The interest rate swap
matures October 3, 2006 and has been designated as a cash flow hedge of the
variable interest payments on the $10,000,000 term loan noted above
(Facility B). Interest expense on Facility B during 2002 and 2001, including
the impact of the interest rate swap, was $654,000 and $165,000,
respectively. The notional amount of the interest rate swap amortizes in the
same manner as Facility B.
57
9. OTHER OPERATING EXPENSES
Components of other operating expenses are as follows for the years ended
December 31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
---- ---- ----
Data processing ........................ $1,328 $1,104 $ 650
Communications ......................... 764 595 584
Amortization of intangible assets ...... 746 543 179
Postage and delivery ................... 700 671 551
Legal and professional ................. 689 618 487
Advertising and promotion .............. 532 687 541
Supplies ............................... 410 578 404
Loan expense ........................... 242 248 194
Regulatory fees ........................ 239 255 149
Administrative ......................... 163 211 196
Education expense ...................... 131 101 62
Dues and subscriptions ................. 97 100 103
Directors fees ......................... 88 70 72
Other general operating ................ 79 67 174
Insurance and bonding .................. 76 105 89
Other .................................. 350 518 287
------ ------ ------
$6,634 $6,471 $4,722
====== ====== ======
10. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 2002,
2001 and 2000 consisted of the following components (in thousands):
58
2002 2001 2000
---- ---- ----
Current:
Federal ................ $ 2,978 $ 1,958 $ 1,432
State .................. 524 351 263
------- ------- -------
Total .............. $ 3,502 $ 2,309 $ 1,695
======= ======= =======
Deferred:
Federal ................ $ (308) $ (611) $ (315)
State .................. (53) (104) (55)
------- ------- -------
Total .............. $ (361) $ (715) $ (370)
======= ======= =======
Total:
Federal ................ $ 2,670 $ 1,347 $ 1,117
State .................. 471 247 208
------- ------- -------
Total .............. $ 3,141 $ 1,594 $ 1,325
======= ======= =======
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
and their respective tax bases. Significant components of and the resultant
deferred tax assets and liabilities at December 31, 2002 and 2001 are as
follows:
2002 2001
---- ----
Gross deferred tax liabilities:
Property and equipment .................................................... $ (991) $ (755)
Unrealized gain on investment securities available for sale ............... (324) (194)
Unearned loan fees ........................................................ - (68)
------- -------
(1,315) (1,017)
Gross deferred tax assets:
Loan loss provisions ...................................................... 2,330 1,776
Unrealized loss on interest rate swap ..................................... 260 -
Intangible assets ......................................................... 266 179
Other items ............................................................... 36 185
------- -------
2,892 2,140
------- -------
Net deferred tax asset ......................................................... $ 1,577 $ 1,123
======= =======
59
The reasons for the differences between the statutory federal income tax
rate and the effective tax rate are summarized as follows for the years
ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Statutory rates ............................ 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income ........... (1.1) (2.1) (2.7)
State income taxes, net ............... 3.6 3.6 2.5
Nondeductible expenses and other ...... 0.3 (0.3) 0.8
---- ---- ----
36.8% 35.2% 34.6%
==== ==== ====
11. LEASE COMMITMENTS
The Company leases certain office space and equipment under noncancelable
operating leases with options to renew at varying terms. Future minimum
rental payments, by year and in the aggregate, required under these leases
are approximately as follows at December 31, 2002:
2003............................. $ 235,000
2004............................. 230,000
2005............................. 197,000
2006............................. 152,000
2007............................. 130,000
Thereafter....................... 360,000
----------
$1,304,000
==========
12. COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and changes in
unrealized gains (losses) on securities available for sale and cash flow
hedges, net of income taxes.
60
Comprehensive income for the years ended December 31, 2002, 2001 and 2000 is
calculated as follows (in thousands):
2002 2001 2000
---- ---- ----
Unrealized (loss) gain recognized in other comprehensive
income (net):
Available for sale securities ............................................. $ 352 $ 563 $ 804
Interest rate swap designated as cash flow hedge .......................... (700) 9 -
------- ------- -------
Total unrealized (loss) gain before income taxes .......................... (348) 572 804
Deferred income taxes ..................................................... (130) 213 300
------- ------- -------
Net of deferred income tax .............................................. $ (218) $ 359 $ 504
======= ======= =======
Amounts reported in net income:
Gain on sale of securities ................................................ $ 195 $ 129 $ -
Interest rate swap designated as cash flow hedge
(290) (54) -
Net amortization (accretion) .............................................. 267 (6) 13
------- ------- -------
Reclassification adjustment ............................................... 172 69 13
Deferred income taxes ..................................................... (64) (26) (5)
------- ------- -------
Reclassification adjustment, net of deferred income tax ................. $ 108 $ 43 $ 8
======= ======= =======
Amounts reported in other comprehensive income:
Net unrealized (loss) gain arising during period, net of tax .............. $ (110) $ 402 $ 512
Reclassification adjustment, net of tax ................................... (108) (43) (8)
------- ------- -------
Unrealized (loss) gain recognized in other comprehensive
income (net) ............................................................ (218) 359 504
Net income ................................................................ 5,384 2,941 2,507
------- ------- -------
Total comprehensive income .............................................. $ 5,166 $ 3,300 $ 3,011
======= ======= =======
13. LOANS TO RELATED PARTIES
Certain officers and directors, and companies in which they held a 10% or
more beneficial ownership, were indebted to (or in some cases, guaranteed
loans by) the Bank. An analysis of such activities follows (in thousands):
2002 2001
---- ----
Balance, January 1 .............................. $ 8,223 $ 7,093
Participations .............................. (758)
New loans and advances ...................... 2,742 2,482
Repayments (excluding renewals) ............. (3,374) (594)
------- -------
Balance, December 31 ............................ $ 7,591 $ 8,223
======= =======
The loans set forth above were made in the normal course of business at
prevailing interest rates and terms.
61
14. DIVIDEND RESTRICTIONS
The Company's primary source of funds is dividends it receives from the
Bank. The payment of dividends by the Bank, in turn, is subject to the
regulations of the Comptroller of the Currency, which require, among other
things, that dividends be paid only from net profits of the current and
immediately preceding two years. At December 31, 2002, the Bank had
approximately $8,137,000 of retained earnings available for dividends to the
Company without being required to seek special regulatory approvals.
As discussed in Note 8 - Other Borrowings, in connection with the Company's
debt covenants, no increases in dividends paid by the Company to its common
shareholders are permitted without consent of the lender.
15. EQUITY
Dividends Declared
The Company declared cash dividends of $0.20 per share in 2002, 2001 and
2000.
16. STOCK BASED COMPENSATION
Stock Options
The Company has long-term incentive plans that provide stock-based awards,
including stock options to certain key employees. The terms of the
Performance-Based Incentive Plan ("the Plan"), which were approved by
shareholders at the annual meeting in April 1998, allowed for a maximum
grant of 540,000 shares. In May 2001, shareholders approved a proposal to
amend the number of shares that may be granted under the long-term incentive
component of the Plan to 800,000 shares. Prior to the approval of the Plan,
there were issued and outstanding options totaling 166,766 of which 33,306
were exercised in 2000, 18,626 were exercised in 2001 and 6,922 were
exercised in 2002. There are 169,025 shares remaining to be issued under the
Plan as of December 31, 2002. Generally, the options granted under the Plan
become exercisable over a three to four year period following the year of
grant, and expire ten years after the date of the grant. The grant price of
all options has been equal to the estimated fair market value of a share of
stock as of the date of grant.
Options outstanding and the activity for December 31, 2002, 2001 and 2000
are presented below:
2002 2001 2000
----------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Grant Price Shares Grant Price Shares Grant Price
------ ----------- ------ ----------- ------ -----------
Employee stock option plans:
Outstanding at beginning of year ........... 637,634 $ 8.34 621,760 $ 7.58 552,566 $ 7.63
Options granted .......................... 112,000 10.90 72,500 9.60 102,500 8.64
Options exercised ........................ 29,547 8.33 30,876 5.39 33,306 3.41
Options forfeited ........................ 35,375 9.96 25,750 8.86 - -
------- --------- ------- -------- ------- --------
Outstanding at end of year .................. 684,712 $ 8.68 637,634 $ 8.34 621,760 $ 7.58
======= ========= ======= ======== ======= ========
Options exercisable at year-end ............. 522,503 $ 8.29 493,087 $ 7.97 391,784 $ 7.40
======= ========= ======= ======== ======= ========
Weighted-average fair value of options
granted during the year ..................... $ 4.12 $ 3.17 $ 2.86
======== ======= ========
62
The following table summarizes information about stock options outstanding
at December 31, 2002.
Outstanding Exercisable
------------------------------- ----------------------
Average Average Average
Exercise Life Exercise Exercise
Price Range Shares (Years) Price Shares Price
----------- ------ ------- ----- ------ -----
$3.06-$3.64 6,922 1.00 $ 3.64 6,922 $ 3.64
$4.00-$4.68 56,558 3.53 4.16 56,558 4.16
$5.00-$8.00 223,732 6.23 7.65 197,398 7.64
$9.00-$10.25 397,500 7.54 9.99 261,625 9.74
------- ---- ------- ------- -------
Total 684,712 6.71 $ 8.68 522,503 $ 8.29
======= ==== ======= ======= =======
Restricted Stock
The Company awarded 17,500 shares of restricted stock under the
Performance-Based Incentive Plan. The weighted average price of restricted
stock vested during 2001 and 2000 was $9.00 and $8.64, respectively.
Compensation expense is recorded on restricted stock over the related
vesting period. Compensation expense is measured based on the fair value of
shares issued at the date of grant. All restricted stock grants were fully
vested at December 31, 2001 and, consequently, no restricted stock expense
was recorded during the year ended December 31, 2002.
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the years ended December 31, 2002, 2001 and 2000 (dollars in
thousands, except per share data):
2002 2001 2000
---- ---- ----
Numerator:
Net income available to common shareholders ......... $ 5,384 $ 2,941 $ 2,507
========== ========== ==========
Denominator:
Denominator for basic earnings per share
Weighted-average shares ........................... 6,104,050 6,094,670 6,095,471
Effects of dilutive securities:
Common stock options .............................. 111,725 93,807 38,799
---------- ---------- ----------
Dilutive potential common shares .................... 111,725 93,807 38,799
---------- ---------- ----------
Denominator for diluted earnings per share
Adjusted weighted-average shares .................... 6,215,775 6,188,477 6,134,270
========== ========== ==========
Basic Earnings Per Share ................................... $ 0.88 $ 0.48 $ 0.41
========== ========== ==========
Diluted Earnings Per Share ................................. $ 0.87 $ 0.48 $ 0.41
========== ========== ==========
63
For the years ended December 31, 2002 and 2000, shares that could
potentially be issued under options and potentially dilute basic earnings
per share in the future that were not included in the computation of
dilutive earnings per share because to do so would have been antidilutive,
totaled 13,278 and 275,145, respectively. There were no anti-dilutive shares
for the year ended December 31, 2001.
18. EMPLOYEE BENEFITS
Profit-Sharing Plan The Company sponsors a 401(k) profit-sharing plan in
which substantially all full-time and part-time employees are eligible to
participate. This plan allows eligible employees to defer a portion of their
salaries on a pretax basis. The Company matches these deferrals on a pro
rata basis as defined in the plan. Contributions and administrative expenses
related to the plan and paid by the plan sponsor totaled approximately
$304,000, $274,000 and $214,000 for the years ended December 31, 2002, 2001
and 2000, respectively.
Health and Welfare Plan
The Company also provides health care, dental care, disability and life
insurance benefits to all full-time employees. Total cost related to these
benefits for 2002, 2001 and 2000 were approximately $708,000, $653,000 and
$561,000, respectively. Beginning in April 2001, full-time employees who
elected health care and/or dental care coverage contributed a portion of the
monthly premium cost.
19. CAPITAL
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy
guidelines, the Company must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. Capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures as defined by regulation and established to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios of
Total and Tier I capital to risk-weighted assets and of Tier I capital to
average assets. If such minimum amounts and ratios are met, the Bank is
considered "adequately capitalized." If a bank exceeds the requirements of
"adequately capitalized" and meets even more stringent minimum standards, it
is considered to be "well capitalized." As of December 31, 2002, the Bank
meets all capital adequacy requirements to which it is subject.
64
The following table summarizes the actual and required capital levels and
ratios for the Company and the Bank at December 31, 2002 and 2001.
Adequately Well
Actual Capitalized Capitalized
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2002:
Total capital (to risk-weighted assets):
Consolidated ........................................ $51,331 8.5% $48,141 8.0% $60,177 10.0%
Bank ................................................ 61,286 10.2% 48,070 8.0% 60,088 10.0%
Tier I capital (to risk-weighted assets):
Consolidated ........................................ 44,757 7.4% 24,071 4.0% 36,106 6.0%
Bank ................................................ 54,712 9.1% 24,035 4.0% 36,053 6.0%
Tier I capital (to average assets):
Consolidated ........................................ 44,757 6.3% 28,362 4.0% 35,453 5.0%
Bank ................................................ 54,712 7.7% 28,336 4.0% 35,420 5.0%
As of December 31, 2001:
Total capital (to risk-weighted assets):
Consolidated ........................................ $44,745 9.0% $39,688 8.0% $49,611 10.0%
Bank ................................................ 51,729 10.4% 39,667 8.0% 49,584 10.0%
Tier I capital (to risk-weighted assets):
Consolidated ........................................ 39,540 8.0% 19,844 4.0% 29,767 6.0%
Bank ................................................ 46,524 9.4% 19,834 4.0% 29,750 6.0%
Tier I capital (to average assets):
Consolidated ........................................ 39,540 6.5% 24,242 4.0% 30,302 5.0%
Bank ................................................ 46,524 7.7% 24,175 4.0% 30,219 5.0%
20. COMMITMENTS AND CONTINGENCIES
Financial Instruments With Off-Balance Sheet Risk
The financial statements do not reflect various commitments and contingent
liabilities, or off-balance sheet risks, that arise in the normal course of
business to meet the financing needs of customers. These include commitments
to extend credit and to honor standby letters of credit. These instruments
involve, to varying degrees, elements of credit, interest rate and liquidity
risks in excess of amounts reflected in the balance sheets. The extent of
the Bank's involvement in these commitments or contingent liabilities is
expressed by the contractual, or notional, amounts of the instruments.
The Company's maximum exposure to credit loss under standby letters of
credit and commitments to extend credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in
establishing commitments and issuing letters of credit as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The amount of collateral
65
obtained, if any, is based on management's credit evaluation in the same
manner as though an immediate credit extension were to be granted.
Commitments to extend credit amount to approximately $147,000,000 and
$122,000,000 at December 31, 2002 and 2001, respectively.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities. The Company had approximately
$8,889,000 and $7,373,000 of standby letters of credit outstanding at
December 31, 2002 and 2001, respectively. The Company does not anticipate
any material losses as a result of participating in standby letters of
credit or commitments to extend credit.
Concentrations of Credit Risk
The Bank originates residential and commercial real estate loans and other
consumer and commercial loans primarily in the north Florida area. In
addition, the Bank occasionally purchases loans, primarily in Florida.
Although the Bank has a diversified loan portfolio, a substantial portion of
its borrowers' ability to repay their loans is dependent upon economic
conditions in the Bank's market area.
Federal Reserve Requirement
The Federal Reserve Board requires that certain banks maintain reserves,
based on their average deposits, in the form of vault cash and average
deposit balances at a Federal Reserve Bank. The requirement as of December
31, 2002 and 2001 was approximately $250,000.
Legal Contingencies
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material adverse effect on the consolidated
financial condition, operations, or liquidity of the Company.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items
include cash and due from banks, interest-bearing deposits with other banks,
federal funds sold, federal funds purchased, securities sold under
repurchase agreements and other short term borrowings. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. The resulting fair values may
be significantly affected by the assumptions used, including the discount
rates and estimates of future cash flows.
The methods and assumptions used to estimate the fair value of the Company's
other financial instruments are as follows:
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents approximate their fair
value.
Federal Home Loan Bank and Federal Reserve Bank Stock
The carrying value of Federal Home Loan Bank and Federal Reserve Bank
stock approximates fair value.
66
Investment Securities
Fair values for investment securities are based on quoted market prices.
If a quoted market price is not available, fair value is estimated using
market prices for similar securities.
Loans
The loan portfolio is segregated into categories and the fair value of
each loan category is calculated using present value techniques based on
projected cash flows and estimated discount rates. The calculated
present values are then reduced by an allocation of the allowance for
loan loss against each respective loan category.
Deposits
The fair values of non-interest bearing deposits, NOW accounts, money
market accounts, and savings accounts are the amounts payable on demand
at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Interest Rate Swap
The interest rate swap is recorded at fair value of ($691,000) at
December 31, 2002. Fair value is based on a dealer quote at December 31,
2002, for an interest rate swap with similar terms.
Notes Payable
The interest rates on the Company's notes payable reprice on a frequent
basis (every three months) and, accordingly, the fair value of these
instruments is assumed to equal their carrying value at December 31,
2002.
Commitments to Extend Credit and Standby Letters of Credit
The estimated fair values for other financial instruments and
off-balance sheet loan commitments are considered to approximate
carrying amounts at December 31, 2002 and 2001 and are based upon fees
charged to enter into similar arrangements as of these dates.
The Company's financial instruments that have estimated fair values
differing from their respective carrying values are presented as follows
at December 31, 2002 and 2001 (in thousands):
2002 2001
------------------------ --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Investment securities held to maturity ................... - - 4,060 4,057
Net loans ................................................ 605,785 625,551 516,350 532,776
Financial liabilities:
Time deposits ............................................ 332,287 334,839 268,537 270,917
67
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that, were the Company
to have disposed of such financial instruments at December 31, 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 December 31, 2002 are not necessarily indicative of
fair values at future dates.
22. BRANCH ACQUISITIONS
On May 11, 2001, the Company purchased the Lake City and Live Oak branches
of Republic Bank. The Company acquired loans and deposits of approximately
$12,000,000 and $62,000,000, respectively. The Company also recorded a core
deposit intangible of approximately $6,000,000, which is being amortized
over its estimated life of 10 years. The results of operations of these
branches are included in the results of operations of the Company from the
date of acquisition forward.
23. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY)
Statements of Financial Condition
December 31, 2002 and 2001
Assets
2002 2001
---- ----
(dollars in thousands)
Cash and cash equivalents ................ $ 415 $ 2,764
Investment in CNB National Bank .......... 61,226 53,563
Other assets ............................. 972 345
------- -------
Total assets ..................... $62,613 $56,672
======= =======
Liabilities and Shareholders' Equity
LIABILITIES
Other borrowings ..................................................... $11,000 $10,000
Other liabilities .................................................... 692 3
------- -------
Total liabilities ............................................ 11,692 10,003
------- -------
SHAREHOLDERS' EQUITY
Common stock ......................................................... 61 61
Additional paid-in capital ........................................... 30,840 30,533
Retained earnings .................................................... 19,912 15,749
Accumulated other comprehensive income, net of taxes ................. 108 326
------- -------
Total shareholders' equity ................................... 50,921 46,669
------- -------
Total liabilities and shareholders' equity .............. $62,613 $56,672
======= =======
68
Statements of Income
For the Year Ended December 31,
2002 2001 2000
---- ---- ----
(dollars in thousands)
Dividend income ...................................................... $ - $ 824 $ 2,755
Interest income ...................................................... 34 25 71
Interest expense ..................................................... (655) (265) -
------- ------- -------
Net interest and dividend income ..................................... (621) 584 2,826
Noninterest income ................................................... 2 6 2
Noninterest expense .................................................. (101) (154) (451)
Realized gains (losses) on available for sale securities ............. - 125 (50)
------- ------- -------
Income before income taxes and equity
in undistributed net income of subsidiary .......................... (720) 561 2,327
Income tax benefit ................................................... 269 98 160
------- ------- -------
Income before equity in undistributed net income of subsidiary ....... (451) 659 2,487
Equity in undistributed net income of subsidiary ..................... 5,835 2,282 20
------- ------- -------
Net income ........................................................... $ 5,384 $ 2,941 $ 2,507
======= ======= =======
69
Statements of Cash Flows
For the Year Ended December 31,
2002 2001 2000
---- ---- ----
(dollars in thousands)
Cash flows from operating activities:
Net income .............................................................. $ 5,384 $ 2,941 $ 2,507
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed earnings of subsidiary ................................. (5,835) (2,282) (20)
Depreciation ......................................................... - 87 41
Non-cash compensation ................................................ - 20 58
Realized gains on available for sale securities ...................... - (125) -
Changes in assets and liabilities:
Other assets ......................................................... (378) (110) 187
Other liabilities .................................................... 162 (25) 28
-------- -------- --------
Net cash (used in) provided by operating activities ................ (667) 506 2,801
-------- -------- --------
Cash flows from investing activities:
Cash paid related to investment in subsidiary ........................... (1,607) (7,000) -
Purchases - buildings and improvements .................................. - - (5,010)
Proceeds from sale of available for sale securities ..................... - 173 -
Purchase of available for sale securities ............................... - - (98)
-------- -------- --------
Net cash used in investing activities .............................. (1,607) (6,827) (5,108)
-------- -------- --------
Cash flows from financing activities:
Proceeds from other borrowings .......................................... 1,000 10,000 -
Cash dividends .......................................................... (1,221) (1,219) (1,226)
Proceeds from exercise of stock options ................................. 246 166 113
Payment to repurchase common stock ...................................... (100) (234) (395)
-------- -------- --------
Net cash (used in) provided by financing activities ................ (75) 8,713 (1,508)
Net (decrease) increase in cash and cash equivalents ......................... (2,349) 2,392 (3,815)
Cash and cash equivalents, beginning of year ................................. 2,764 372 4,187
-------- -------- --------
Cash and cash equivalents, end of year ....................................... $ 415 $ 2,764 $ 372
======== ======== ========
During 2001, the Parent Company transferred its Deerwood and Gainesville
buildings, land and related equipment having a combined value of $8.7
million to the Bank as a capital contribution.
70
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
On May 22, 2002 CNB Florida Bancshares, Inc. (the "Company") dismissed its
independent accountants, Arthur Andersen LLP ("Andersen") and appointed
PricewaterhouseCoopers LLP as its new independent accountants, effective
immediately. This termination followed the Company's decision to seek
statements of qualifications from independent accountants to audit the
Company's financial statements for the fiscal year ending December 31, 2002.
The decision to dismiss Andersen and to retain PricewaterhouseCoopers LLP
was approved by the Company's Board of Directors on May 22, 2002, upon the
recommendation of its Audit Committee.
During the Company's two most recent fiscal years ended December 31, 2001,
and the subsequent interim period through March 31, 2002, there were no
disagreements between the Company and Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements if not resolved to Andersen's satisfaction
would have caused them to make reference to the subject matter of the
disagreement in connection with their reports.
None of the reportable events described under Item 302 (a) (1) (v) of
Regulation S-K occurred within the Company's two most recent fiscal years
and the subsequent interim period through March 31, 2002.
The audit reports of Andersen on the consolidated financial statements of
the Company and its subsidiary as of December 31, 2001 and 2000 did not
contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles.
During the Company's two most recent fiscal years ended December 31, 2001
and the subsequent interim period through March 31, 2002, the Company did
not consult with PricewaterhouseCoopers LLP regarding any of the matters or
events set forth in Item 302 (a) (2) (i) and (ii) of Regulation S-K.
During the Company's most recent fiscal year ended December 31, 2002, there
were no disagreements between the Company and PricewaterhouseCoopers on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not
resolved to PricewaterhouseCoopers' satisfaction would have caused them to
make reference to the subject matter of the disagreement in connection with
their report.
PART III
Except for the information relating to the Company's executive officers and
its key employees, the material required by items 10 through 13 is hereby
incorporated by reference from the Company's definitive proxy statement
pursuant to Instruction G of Form 10-K. The Company will file its definitive
Proxy Statement with the Commission prior to April 30, 2003.
71
CONTROLS AND PROCEDURES
Within ninety days prior to the filing of the Report on Form 10-K, 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.
No significant changes have been made to the Company's disclosure controls
and procedures subsequent to the evaluation.
PART IV
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
---------
3(i) Articles of Incorporation (Incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement No.
33-71082, as amended, on Form S-4 filed February 8, 1994).
3(ii) By-laws (Incorporated by reference to Exhibit 3.4 to the
Company's Registration Statement No. 33-71082, as amended, on
Form S-4 filed February 8, 1994).
10(i) Bennett Brown Employment Agreement (Incorporated by reference
to Exhibit 10 of the Company's June 30, 1999 10-Q filed on
August 16, 1999).
10(ii) K. C. Trowell Employment Agreement (Incorporated by reference
to Exhibit 10 (i) to the Company's Pre-Effective Amendment No.
1 to its Registration Statement on Form S-2 filed as of
January 26, 1999).
10(iii) G. Thomas Frankland Employment Agreement (Incorporated by
reference to Exhibit 10 (ii) to the Company's Pre-Effective
Amendment No. 1 to its Registration Statement on Form S-2
filed as of January 26, 1999).
10(iv) 1998 Performance-Based Incentive Plan (Incorporated by
reference to Exhibit 99 to the Company's Registration
Statement on Form S-8 filed December 7, 1998).
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP, independent certified
public accountants.
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.
Report of Form 8-K:
-------------------
On October 23, 2002, the Company filed a Form 8-K to report its 2002
third quarter earnings.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CNB Florida Bancshares, Inc.
----------------------------
(Registrant)
By: /s/ G. Thomas Frankland
-----------------------
G. Thomas Frankland
Executive Vice President
and Chief Financial Officer
Date: March 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Thomas R. Andrews March 26, 2003
---------------------
Thomas R. Andrews Director
/s/ Audrey S. Bullard March 26, 2003
---------------------
Audrey S. Bullard Director
/s/ Raymon J. Land March 26, 2003
------------------
Raymon J. Land Director
/s/ Jon W. Pritchett March 26, 2003
--------------------
Jon W. Pritchett Director
/s/ Marvin H. Pritchett March 26, 2003
-----------------------
Marvin H. Pritchett Director
/s/ William J. Streicher March 26, 2003
------------------------
William J. Streicher Director
/s/ Halcyon E. Skinner March 26, 2003
----------------------
Halcyon E. Skinner Director
/s/ K. C. Trowell March 26, 2003
-----------------
K. C. Trowell Chairman, CEO & Director
/s/ G. Thomas Frankland Executive Vice President March 26, 2003
----------------------- and Chief Financial Officer
G. Thomas Frankland (Principal Financial Officer)
/s/ Martha S. Tucker March 26, 2003
-------------------- Controller
Martha S. Tucker (Principal Accounting Officer)
73
CERTIFICATIONS
I, K. C. Trowell, certify that:
1. I have reviewed this annual report on Form 10-K of CNB Florida
Bancshares, Inc.
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 26, 2003
/s/ K. C. Trowell
------------------------------------
K. C. Trowell
Chairman of the Board, President and
Chief Executive Officer
74
I, G. Thomas Frankland, certify that:
1. I have reviewed this annual report on Form 10-K of CNB Florida
Bancshares, Inc.
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 26, 2003
/s/ G. Thomas Frankland
----------------------------
G. Thomas Frankland
Executive Vice President and
Chief Financial Officer
75