UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 (no fee required)
For the quarterly period ended March 31, 2003
-----------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
For the transition period from ________ to ________
Commission File No. 0-25988
CNB Florida Bancshares, Inc.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-2958616
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9715 Gate Parkway North
Jacksonville, Florida 32246
- ------------------------------ ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 997-8484
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
The number of shares of the registrant's common stock outstanding as of April
30, 2003 was 6,211,750 shares, $0.01 par value per share.
CNB FLORIDA BANCSHARES, INC.
FINANCIAL REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition ......................................................... 3
Consolidated Statements of Income ......................................................................4
Consolidated Statements of Cash Flows ...................................................................5
Notes to Consolidated Financial Statements ..............................................................6
Selected Financial Data ................................................................................10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview ...............................................................................................11
Results of Operations ..................................................................................11
Liquidity and Interest Rate Sensitivity.................................................................14
Earning Assets..........................................................................................18
Funding Sources ........................................................................................22
Capital Resources ......................................................................................22
Critical Accounting Policies ...........................................................................23
Item 3. Quantitative and Qualitative Disclosure About Market Risk .....................................23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................25
Item 2. Changes in Securities and Use of Proceeds .....................................................25
Item 3. Defaults Upon Senior Securities ...............................................................25
Item 4. Submission of Matters to a Vote of Security Holders ...........................................25
Item 5. Other Information .............................................................................25
Item 6. Exhibits and Reports on Form 8-K ..............................................................25
2
PART I
FINANCIAL INFORMATION
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS (Unaudited)
March 31, December 31,
2003 2002
--------- ----------
(thousands)
Cash and cash equivalents:
Cash and due from banks $ 21,029 $ 15,986
Federal funds sold 10,750 5,400
Interest-bearing deposits in other banks 47,169 12,215
--------- ---------
Total cash and cash equivalents 78,948 33,601
Investment securities available for sale 57,080 49,682
Loans:
Commercial 101,609 111,033
Commercial real estate 330,230 324,525
Mortgages (including home equity) 138,274 132,513
Consumer 30,710 32,199
Credit card 1,076 1,164
Tax free 4,063 4,351
--------- ---------
Total loans, net of unearned income 605,962 605,785
Less: Allowance for loan losses (6,548) (6,574)
--------- ---------
Net loans 599,414 599,211
Loans held for sale 1,836 10,893
Premises and equipment, net 24,945 25,086
Intangible assets, net 5,875 6,056
Other assets 6,107 6,145
--------- ---------
TOTAL ASSETS $ 774,205 $ 730,674
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 90,539 $ 80,065
Savings, NOW and money market 253,792 236,284
Time under $100,000 178,201 172,671
Time $100,000 and over 172,284 159,616
--------- ---------
Total deposits 694,816 648,636
Securities sold under repurchase agreements and federal funds purchased 10,554 14,446
Other borrowings 11,000 11,000
Other liabilities 6,259 5,671
--------- ---------
Total liabilities 722,629 679,753
--------- ---------
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,
6,142,450 shares issued and outstanding at March 31, 2003 and
6,125,500 shares issued and outstanding at December 31, 2002
61 61
Additional paid-in capital 30,999 30,840
Retained earnings 20,538 19,912
Accumulated other comprehensive (loss) income, net of taxes (22) 108
--------- ---------
Total shareholders' equity 51,576 50,921
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 774,205 $ 730,674
========= =========
3
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2003 2002
---------- ----------
(thousands)
Interest Income
Interest and fees on loans $ 10,075 $ 9,252
Interest on investment securities available for sale 461 436
Interest on investment securities held to maturity - 41
Interest on federal funds sold 38 13
Interest on interest-bearing deposits 123 2
---------- ----------
Total interest income 10,697 9,744
Interest Expense
Interest on deposits 3,942 3,665
Interest on repurchases and federal funds purchased 27 61
Interest on other borrowings 168 161
---------- ----------
Total interest expense 4,137 3,887
---------- ----------
Net interest income 6,560 5,857
Provision for Loan Losses 675 500
---------- ----------
Net interest income after provision for loan losses 5,885 5,357
Non-Interest Income
Service charges 855 740
Secondary market mortgage sales 507 473
Other fees and charges 247 191
Gain on called investment securities 13 -
---------- ----------
Total non-interest income 1,622 1,404
Non-Interest Expense
Salaries and employee benefits 2,854 2,743
Occupancy and equipment expenses 903 822
Other operating expenses 1,712 1,594
---------- ----------
Total non-interest expense 5,469 5,159
---------- ----------
Income before income taxes 2,038 1,602
Provision for income taxes 737 607
---------- ----------
NET INCOME $ 1,301 $ 995
========== ==========
Earnings Per Share (Note 3):
Basic earnings per common share $ 0.21 $ 0.16
========== ==========
Weighted average shares outstanding 6,126,940 6,101,099
========== ==========
Diluted earnings per common share $ 0.21 $ 0.16
========== ==========
Diluted weighted average shares outstanding 6,327,413 6,152,808
========== ==========
4
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------- --------
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,301 $ 995
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on called investment securities available for sale (13) -
Depreciation and amortization 644 620
Provision for loan losses 675 500
Investment securities amortization, net 121 42
Net proceeds from loans held for sale 9,057 4,690
Changes in assets and liabilities:
Other assets 111 (796)
Other liabilities 219 1,107
-------- --------
Net cash provided by operating activities 12,115 7,158
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale (20,637) (11,253)
Proceeds from maturities of securities available for sale 5,926 2,922
Proceeds from called securities available for sale 7,000 4,000
Proceeds from called securities held to maturity - 2,021
Net increase in loans (877) (8,588)
Purchases of premises and equipment, net (321) (86)
-------- --------
Net cash used in investing activities (8,909) (10,984)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 46,180 16,757
Net decrease in securities sold under repurchase agreements
and federal funds purchased (3,892) (6,139)
Cash dividends (306) (305)
Repurchase of common stock - (100)
Proceeds from exercise of stock options 159 -
-------- --------
Net cash provided by financing activities 42,141 10,213
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 45,347 6,387
CASH AND CASH EQUIVALENTS, beginning of period 33,601 20,677
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 78,948 $ 27,064
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 3,772 $ 4,582
======== ========
Taxes paid $ 271 $ 146
======== ========
5
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q which do not require all information and
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. In the opinion of management, such
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the financial position,
results of operations and cash flows for the interim periods presented.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. Management's discussion and analysis should be read in conjunction with
the consolidated financial statements. Certain amounts and captions relating to
2002 have been reclassified to conform to current year presentation.
Accounting policies followed in the presentation of interim financial results
are presented in Note 2 of CNB Florida Bancshares, Inc.'s (the "Company")
audited consolidated financial statements included in Form 10-K for the year
ended December 31, 2002, which is available on the Company's web site at
www.cnbnb.com.
Note 2. Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, CNB National Bank. All significant intercompany
accounts and transactions have been eliminated.
Note 3. Earnings Per Share
Basic earnings per common share is calculated based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per common share is calculated based on the weighted average number of shares of
common stock outstanding and common stock equivalents, consisting of outstanding
stock options that have a dilutive effect on earnings per share. Common stock
equivalents are determined using the treasury stock method for diluted shares
outstanding. The difference between diluted and basic shares outstanding is
common stock equivalents from stock options outstanding during the periods ended
March 31, 2003 and 2002.
The following table sets forth the computation of earnings per share for the
three month periods ended March 31, 2003 and 2002.
Three Months Ended
March 31, March 31,
2003 2002
---------- ----------
Numerator:
Net income available to common shareholders $ 1,301 $ 995
========== ==========
Denominator:
Denominator for basic earnings per common share
Weighted-average shares 6,126,940 6,101,099
Effect of dilutive securities:
Common stock options 200,473 51,709
---------- ----------
Dilutive potential common shares 200,473 51,709
---------- ----------
Denominator for diluted earnings per common share
Adjusted weighted average shares 6,327,413 6,152,808
========== ==========
Basic earnings per common share $ 0.21 $ 0.16
========== ==========
Diluted earnings per common share $ 0.21 $ 0.16
========== ==========
6
Note 4. Comprehensive Income
Comprehensive income is defined as the total of net income and all other changes
in equity. The following table details the Company's comprehensive income for
the three months ending March 31, 2003 and 2002.
Three Months Ended
March 31, March 31,
2003 2002
------- -------
Unrealized (loss) gain recognized in other comprehensive income (net):
Available for sale securities $ (204) $ (260)
Interest rate swap designated as cash flow hedge (3) 94
------- -------
Total unrealized loss before income taxes (207) (166)
Deferred income taxes (77) (62)
------- -------
Net of deferred income tax $ (130) $ (104)
======= =======
Amounts reported in net income:
Gain on called securities $ 13 $ -
Interest rate swap designated as cash flow hedge (84) (69)
Net amortization (accretion) 121 42
------- -------
Reclassification adjustment 50 (27)
Deferred income taxes 19 (10)
------- -------
Reclassification adjustment, net of deferred income tax $ 31 $ (17)
======= =======
Amounts reported in other comprehensive income:
Net unrealized loss arising during period, net of tax $ (99) $ (121)
Reclassification adjustment, net of tax (31) 17
------- -------
Unrealized loss arising during period, net of tax (130) (104)
Net income 1,301 995
------- -------
Total comprehensive income $ 1,171 $ 891
======= =======
7
Note 5. 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 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
---------------------------- ---------------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
------- -------- -------- --------
Net income $ 1,301 $ 995 $ 1,280 $ 955
Basic earnings per common share $ 0.21 $ 0.16 $ 0.21 $ 0.16
Diluted earnings per common share $ 0.21 $ 0.16 $ 0.20 $ 0.16
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. There were no employee stock
options granted during the three months ended March 31, 2003. The
weighted-average grant date fair values of options granted during 2002 were
based on the following assumptions:
Risk-free interest rate ............ 5.13%
Dividend yield ..................... 1.88%
Volatility ......................... 38.00%
Expected lives ..................... 6 years
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 2003 and 2002 may not be indicative of future
amounts.
Note 6. Recent 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 adopted the provisions of this Statement on January 1, 2003, which 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 provisions of this Statement were adopted by
the Company on January 1, 2003, which did not have a significant impact on the
Company's consolidated financial statements.
8
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.
9
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
Unaudited Selected Financial Data
Three Months Ended
March 31,
Dollars in thousands except per share information. 2003 2002
====================================================================================================================================
SUMMARY OF OPERATIONS:
Total interest income $ 10,697 $ 9,744
Total interest expense (4,137) (3,887)
----------- -----------
Net interest income 6,560 5,857
Provision for loan losses (675) (500)
----------- -----------
Net interest income after provision for loan losses 5,885 5,357
Non-interest income 1,622 1,404
Non-interest expense (5,469) (5,159)
----------- -----------
Income before taxes 2,038 1,602
Income taxes (737) (607)
----------- -----------
Net income $ 1,301 $ 995
=========== ===========
====================================================================================================================================
PER COMMON SHARE:
Basic earnings $ 0.21 $ 0.16
Diluted earnings 0.21 0.16
Book value 8.40 7.75
Dividends Declared 0.06 0.05
Actual shares outstanding 6,142,450 6,095,953
Weighted average shares outstanding 6,126,940 6,101,099
Diluted weighted average shares outstanding 6,327,413 6,152,808
====================================================================================================================================
KEY RATIOS:
Return on average assets 0.70% 0.66%
Return on average shareholders' equity 10.22 8.48
Dividend payout 23.81 31.25
Efficiency ratio 66.84 71.05
Total risk-based capital ratio 8.80 8.87
Average shareholders' equity to average assets 6.80 7.73
Tier 1 leverage 6.07 6.65
====================================================================================================================================
FINANCIAL CONDITION AT PERIOD-END:
Assets $ 774,205 $ 624,340
Loans 605,962 519,901
Deposits 694,816 549,648
Shareholders' equity 51,576 47,262
====================================================================================================================================
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following analysis reviews important factors affecting the financial
condition and results of operations of CNB Florida Bancshares, Inc. for the
three months ended March 31, 2003 and 2002. This financial information should be
read in conjunction with the unaudited consolidated financial statements of CNB
Florida Bancshares, Inc. ("the Company") and its wholly owned subsidiary, CNB
National Bank ("the Bank"), included in "Item 1. Financial Statements" above and
the audited consolidated financial statements included in the Company's Form
10-K for the year ended December 31, 2002. The Company makes its Securities and
Exchange Commission filings available on its website at www.cnbnb.com. The
analysis contains forward-looking statements with respect to financial and
business matters, which are subject to risks and uncertainties, that may change
over a period of time. These risks and uncertainties include but are not limited
to changes in the interest rate environment that may reduce margins, general
economic or business conditions in the Company's markets that lead to a
deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Actual
results could be significantly different from the forward-looking statements
contained herein. The Company has no foreign operations; accordingly, there are
no assets or liabilities attributable to foreign operations.
RESULTS OF OPERATIONS
The Company's earnings for the three month period ended March 31, 2003 were
$1,301,000, or $0.21 per diluted share, compared to $995,000, or $0.16 per
diluted share, in the first quarter of 2002. These results reflect growth in net
interest income and non-interest income. Total assets increased to $774.2
million compared to $730.7 million at December 31, 2002. Total outstanding loans
and deposits rose 17% and 26% to $606.0 million and $694.8 million,
respectively, at March 31, 2003 from $519.9 million and $549.6 million,
respectively, at March 31, 2002.
Net Interest Income
Net interest income is the single largest source of revenue for the Bank
and consists of interest and fee income generated by earning assets, less
interest expense paid on interest bearing liabilities. The Company's primary
objective is to manage its assets and liabilities to provide the largest
possible amount of income while balancing interest rate, credit quality,
liquidity and capital risks. Net interest income for the first quarter of 2003
was $6.6 million, compared to $5.9 million for the first three months in 2002,
an increase of 12%. Loan growth and spread management were the primary
contributors to the increase in net interest income.
Total average earning assets increased by $143.2 million, or 26% to $702.7
million in 2003, compared to $559.4 million in 2002. Increases in time, money
market and other interest bearing deposits, were the main contributors in the
$128.1 million, or 26%, growth in average interest bearing liabilities.
Net interest margin declined to 3.79% in the first quarter of 2003,
compared to 4.25% for the same period in 2002. Total earning asset yields
decreased to 6.17% in 2003 from 7.06% in 2002 and rates on interest-bearing
liabilities decreased to 2.73% in 2003 from 3.23% in 2002. Interest income
increased 10% while interest expense increased 6% for the 2003 quarter over
comparable 2002 amounts. The increased interest income and expense reflects
growth in loans and deposits that outpaced the decline in yields and rates over
this period. The decline in net interest yield reflects spread tightening as a
result of declining loan yields and an increase in lower yielding, short-term
investments. Table 1: "Average Balances - Yields and Rates" provides the
Company's average volume of interest earning assets and interest bearing
liabilities for the first quarter of 2003 and 2002.
11
Table 1: Average Balances - Yields and Rates
Three Months Ended March 31, 2003 Three Months Ended March 31, 2002
---------------------------------- ----------------------------------
Interest Interest
Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate
---------- ---------- ------- --------- ---------- -------
(dollars in thousands)
ASSETS:
Federal funds sold $ 13,024 $ 38 1.18% $ 3,154 $ 13 1.67%
Investment securities
available for sale 47,805 461 3.91 38,685 436 4.57
Investment securities
held to maturity - - - 2,832 41 5.87
Loans (1) 604,042 10,075 6.76 514,332 9,252 7.30
Interest bearing deposits 37,820 123 1.32 439 2 1.85
---------- ---------- -------- --------- ---------- ----
TOTAL EARNING ASSETS 702,691 10,697 6.17 559,442 9,744 7.06
All other assets 56,445 55,482
---------- ---------
TOTAL ASSETS $ 759,136 $ 614,924
========== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW and money markets $ 222,862 $ 943 1.72% $ 171,855 $ 763 1.80%
Savings 23,244 29 0.51 21,004 39 0.75
Time deposits 346,895 2,970 3.47 268,598 2,863 4.32
Repurchases and federal
funds purchased 11,638 27 0.94 16,100 61 1.54
Short term borrowings 1,000 7 2.84 - - -
Other borrowings 10,000 161 6.53 10,000 161 6.53
---------- ---------- ----- --------- ---------- ----
TOTAL INTEREST BEARING
LIABILITIES 615,639 4,137 2.73 487,557 3,887 3.23
Demand deposits 85,721 75,430
Other liabilities 6,126 4,374
Shareholders' equity 51,650 47,563
---------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 759,136 $ 614,924
========== =========
---- ----
INTEREST SPREAD (2) 3.44% 3.83%
==== ====
---------- ----------
NET INTEREST INCOME $ 6,560 $ 5,857
========== ==========
NET INTEREST MARGIN (3) 3.79% 4.25%
==== ====
- ----------
(1) Interest income on average loans includes loan fee recognition of $154,000
and $123,000 in 2003 and 2002, respectively.
(2) Represents the average rate earned minus average rate paid.
(3) Represents net interest income divided by total earning assets.
12
Table 1a: Analysis of Changes in Interest Income and Expense
NET CHANGE MARCH 31, NET CHANGE MARCH 31,
2002-2003 ATTRIBUTABLE TO: 2001-2002 ATTRIBUTABLE TO:
---------------------------------- ---------------------------------
Net Net
Volume (1) Rate (2) Change Volume (1) Rate (2) Change
---------- -------- ------ ---------- -------- ------
(thousands)
INTEREST INCOME:
Federal funds sold $ 41 $ (16) $ 25 $ 23 $ (25) $ (2)
Investment securities available for sale 103 (78) 25 84 (167) (83)
Investment securities held to maturity (41) - (41) (68) (2) (70)
Loans 1,480 (657) 823 2,770 (2,425) 345
Interest bearing deposits 170 (49) 121 4 (5) (1)
------- ------- ------- ------- ------- -------
Total 1,753 (800) 953 2,813 (2,624) 189
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW and money markets 226 (46) 180 427 (625) (198)
Savings 4 (14) (10) 15 (33) (18)
Time deposits 835 (728) 107 1,224 (1,473) (249)
Repurchases and federal funds
purchased (10) (24) (34) 9 (134) (125)
Short term borrowings 7 - 7 (537) - (537)
Other borrowings - - - 161 - 161
------- ------- ------- ------- ------- -------
Total 1,062 (812) 250 1,299 (2,265) (966)
------- ------- ------- ------- ------- -------
Net interest income $ 691 $ 12 $ 703 $ 1,514 $ (359) $ 1,155
======= ======= ======= ======= ======= =======
- ----------
(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 $1.6 million for the first quarter of 2003, an
increase of 16% from $1.4 million earned in the comparable period in 2002. The
increase was primarily attributed to an $115,000 increase in service charges
from the increased deposit base, a $34,000 increase in secondary market loan
sale income and a $35,000 increase in investment services income. During the
first quarter of 2003, the Company began selling a larger portion of its
secondary market mortgage loans through table funding arrangements. Under table
funding arrangements, the Company receives payment for the loans it sells at the
time the loan is funded. These loans are not warehoused on the Company's balance
sheet, accordingly, it is expected that the level of loans held for sale will
continue to decline as more secondary market originations and sales are handled
through table funding arrangements.
Non-interest income, annualized, as a percentage of average assets was
0.87% for the first quarter ended March 31, 2003, compared to 0.93% for the
comparable period in 2002.
Non-Interest Expense
Non-interest expense increased 6% to $5.5 million in the 2003 quarter
compared to $5.2 million in the 2002 quarter. The increase is attributable to
increases in personnel, occupancy, equipment and data processing expenses. As a
percentage of average assets, annualized non-interest expense decreased to 2.9%
from 3.4% in the first quarter 2003 and 2002, respectively. This decline
reflects the Company's continued focus on overhead expense management. Salaries
and employee benefits increased $111,000 or 4% to $2.9 million for the first
three months of 2003, compared to $2.7 million for the same period in 2002. As a
percentage of average assets annualized, salaries and employee benefits
13
decreased to 1.52% from 1.81%, for the first quarter of 2003 and 2002,
respectively. Full-time equivalent employees increased by 9 during the first
quarter of 2003 as compared to the same period in 2002.
Occupancy expense (including premises, furniture, fixtures and equipment)
increased $81,000, or 10% during the three months ended March 31, 2003 compared
to the same period in 2002. The increase is primarily attributable to an
increase in property taxes, insurance, building depreciation and data processing
depreciation expenses.
Other operating expenses increased $118,000, or 7%, in the first quarter of
2003 compared to the same period in 2002. The following table details the areas
of significance in other operating expenses.
Table 2: Other Operating Expenses
Three Months Ended March 31,
2003 2002
--------------- --------------
(thousands)
Data processing $ 356 $ 319
Legal and professional 199 196
Communications 189 179
Amortization of intangible assets 182 187
Postage and delivery 175 157
Advertising and promotion 125 113
Supplies 94 116
Loan expenses 77 46
Regulatory fees 66 58
Administrative 35 44
Other general operating 34 20
Education expense 30 22
Insurance and bonding 29 24
Dues and subscriptions 27 24
Directors fees 23 19
Other 71 70
------ ------
Total other operating expenses $1,712 $1,594
====== ======
Income Taxes
The Company's income tax expense in interim reporting periods is determined
by estimating the combined federal and state effective tax rate for the year and
applying such rate to interim pre-tax income. The Company's estimated annual
effective tax rate for 2003 is approximately 36%.
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 $118.6
million and represented 17% of average total deposits during the first quarter
of 2003, compared to $59.8 million and 11% for 2002. Average loans were 89% and
96% of average deposits for the three month periods ended March 31, 2003 and
2002, respectively.
In addition to core deposit growth, sources of funds available to meet
liquidity demands include cash received through ordinary business activities
such as the collection of interest and fees, federal funds sold, loan and
investment maturities and lines for the purchase of federal funds by the Company
from its principal correspondent banks. The Bank is also a member of the Federal
Home Loan Bank and has access to short-term and long-term funds. In addition,
14
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 March 31, 2003 was approximately ($693,000).
There was $1 million outstanding on the $3 million line of credit on March 31,
2003. 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 6%.
In addition, the Company is subject to the following restrictions:
o No additional debt is permitted without consent of the lender.
o No increases in dividends paid by the Company to its common shareholders
are permitted without consent of the lender.
Failure to maintain any of these covenants would place the Company in
default of the line of credit agreement. In such a case, absent any waivers
obtained from the lender, all amounts payable could be accelerated and become
due immediately. As of March 31, 2003, the Company was in compliance with all
covenants.
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities, at a given time interval, including both
floating rate instruments and instruments that are approaching maturity.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize the
overall interest rate risk to the Company.
The Company's liquidity position increased during the quarter as compared
to the fourth quarter 2002 as loan balances were essentially flat while deposit
growth continued. The Company continues to maintain an asset sensitive position
with respect to net interest income. Maintaining this profile will allow the
Company to take advantage of an anticipation of rising rates.
The Company's gap and liquidity positions are reviewed on a regular basis
by management to determine whether or not changes in policies and procedures are
necessary to achieve financial goals. This analysis includes assumptions about
balance sheet growth and related mix as well as pricing and maturity profile.
Included in the review is an internal analysis of the possible impact on net
interest income due to market changes in interest rates. Based on this internal
analysis, at March 31, 2003, a gradual increase in interest rates of 200 basis
points would have increased net interest income over the ensuing twelve-month
period by 4.50%. A gradual decrease in interest rates of 200 basis points over
15
this same period would have decreased net interest income by 4.49% as compared
to a stable rate environment. At March 31, 2003, the Bank's net economic value
ratio was 8.45% and 10.86%, assuming a gradual increase or decrease,
respectively, in interest rates of 200 basis points over a 12-month period. The
net economic value ratio is the market value of equity divided by the market
value of assets and measures the Bank's capitalization, talking into account
balance sheet gains and losses.
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 at March 31, 2003, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances.
16
Table 3: Rate Sensitivity Analysis
March 31, 2003
(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 $ 108,701 $ 51,438 $ 38,314 $ 41,493 $ 45,527 $ 95,865 $ 381,338 $ 398,337
Average interest rate 6.92% 7.38% 7.57% 7.37% 7.19% 6.87% 7.12%
Variable rate loans 63,705 17,301 24,130 13,856 14,882 90,750 224,624 224,679
Average interest rate 5.34% 5.63% 5.13% 5.66% 6.12% 6.81% 6.01%
Investment securities (1)
Fixed rate investments 18,086 1,500 5,486 - - 27,791 52,863 53,507
Average interest rate 4.21% 2.00% 3.24% 4.46% 4.18%
Variable rate investments - - - - - 440 440 454
Average interest rate 4.30% 4.30%
Federal funds sold 10,750 - - - - - 10,750 10,750
Average interest rate 1.16% 1.16%
Other earning assets (2) 50,288 - - - - - 50,288 50,288
Average interest rate 1.58% 1.58%
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 251,530 $ 70,239 $ 67,930 $ 55,349 $ 60,409 $ 214,846 $ 720,303 $ 738,015
Average interest rate 5.01% 6.83% 6.35% 6.94% 6.93% 6.53% 6.08%
========= ========= ========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
- -----------------------------
NOW $ 67,216 $ - $ - $ - $ - $ 65,513 $ 132,729 $ 132,729
Average interest rate 1.99% 0.50% 1.25%
Money market 92,691 - - - - 4,436 97,127 97,127
Average interest rate 2.37% 1.24% 2.32%
Savings - - - - - 23,936 23,936 23,936
Average interest rate 0.50% 0.50%
CD's under $100,000 107,428 36,237 24,508 9,261 767 - 178,201 179,759
Average interest rate 2.72% 3.82% 4.05% 4.32% 4.64% 3.22%
CD's $100,000 and over 120,361 26,534 17,447 5,546 2,396 - 172,284 173,848
Average interest rate 3.29% 4.04% 4.09% 4.42% 5.13% 3.55%
Securities sold under
repurchase agreements and
federal funds purchased 10,554 - - - - - 10,554 10,554
Average interest rate 0.95% 0.95%
Short-term borrowings 1,000 - - - - - 1,000 1,000
Average interest rate 2.83% 2.83%
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 $ 399,250 $ 64,199 $ 43,383 $ 21,951 $ 3,163 $ 93,885 $ 625,831 $ 628,953
Average interest rate 2.64% 3.90% 4.05% 4.07% 5.01% 0.53% 2.61%
========= ========= ========= ========= ========= ========= ========= =========
- ----------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net unrealized gains of $658,000.
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank
Stock, Federal Home Loan Bank Stock and other marketable equity securities.
(3) Other borrowings consists of a term loan maturing October 3, 2006 that
bears interest at 3-month Libor plus 170 basis points. The variable rate is
reset quarterly. The variable interest payments on the term loan are being
hedged through an interest rate swap. Under the interest rate swap, the
Company pays a fixed rate of interest of 6.45% and receives a floating rate
of interest of 3-month Libor plus 170 basis points. Other terms of the swap
mirror those of the term debt.
17
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, averaged 75% of total average deposits for the three months
ended March 31, 2003 compared with 76% for the three months ended December 31,
2002. The Bank closely monitors its reliance on time deposits in excess of
$100,000, which are generally considered less stable and less reliable than core
deposits. Table 4, below, sets forth the amounts of time deposits with balances
of $100,000 or more that mature within indicated periods. The Bank does not, nor
has it ever, solicited brokered deposits.
Table 4: Maturity of Time Deposits of $100,000 or More
March 31, 2003
(dollars in thousands)
Amount
Three months or less $ 41,324
Three through six months 38,301
Six through twelve months 40,736
Over twelve months 51,923
-------
Total $172,284
=======
EARNING ASSETS
Loans
Lending activities are the Company's single largest source of revenue.
Although management is continually evaluating alternative sources of revenue,
lending is the major segment of the Company's business and is key to
profitability. During the first quarter of 2003, average loans were $604.0
million and were 89% of average deposits, compared to $514.3 million and 96% for
the same period in 2002. The following table reflects the composition of the
Company's loan portfolio as of March 31, 2003 compared to December 31, 2002.
Table 5: Loan Portfolio Composition
March 31, December 31,
2003 2002
--------- ----------
(thousands)
Commercial $ 101,609 $ 111,033
Commercial real estate 330,230 324,525
Mortgages (including home equity) 138,274 132,513
Consumer 30,710 32,199
Credit card 1,076 1,164
Tax free 4,063 4,351
--------- ---------
Total loans, net of unearned income 605,962 605,785
Less: allowance for loan losses (6,548) (6,574)
--------- ---------
Net loans $ 599,414 $ 599,211
========= =========
Loan concentrations are considered to exist where there are amounts loaned
to multiple borrowers engaged in similar activities which collectively would be
similarly impacted by economic or other conditions and when the total of such
amounts exceeds 25% of total capital. Due to the lack of diversified industry
and the relative proximity of markets served, the Company has concentrations in
geographic as well as in types of loans funded. The Bank's four largest
concentration categories are: Land Development ($40.92 million), Commercial Real
Estate ($30.2 million), Professional ($29.1 million) and Commercial Construction
($24.5 million).
Loan Quality
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
18
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,
can and will fluctuate.
The allowance for loan losses on March 31, 2003, was 1.08% of total loans,
compared to 1.09% at December 31, 2002 and 1.03% at March 31, 2002. Table 6:
"Allocation of Allowance for Loan Losses", set forth below, indicates the
specific reserves allocated by loan type.
Table 6: Allocation of Allowance for Loan Losses
March 31, December 31,
2003 2002
----------------------------- -------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ -------------
(dollars in thousands)
Commercial $2,413 16.8% $1,991 18.3%
Commercial real estate 2,836 54.5 3,180 53.6
Mortgages (including home equity) 526 22.8 495 21.9
Consumer 576 5.0 802 5.3
Credit card 118 0.2 106 0.2
Tax free - 0.7 - 0.7
Unallocated 79 - - -
------ ------ ------ -----
Total $6,548 100.0% $6,574 100.0%
====== ====== ====== =====
Non-performing assets consist of non-accrual loans, loans past due 90 days
or more and still accruing interest, other real estate owned and repossessions.
Non-performing assets decreased by $582,000 from December 31, 2002 to $7.5
million at March 31, 2003. Non-performing assets as a percentage of total assets
decreased to .97% on March 31, 2003 from 1.11% on December 31, 2002. Non-accrual
loans include two secured credits that make up approximately 57% of the balance.
Both relationships are collateralized by commercial real estate, and the Company
is in the process of actively resolving each of them. Any expected losses on
these loans have been included in the allowance for loan losses at March 31,
2003.
Table 7: Non-Performing Assets
March 31, December 31,
2003 2002
--------- -----------
(dollars in thousands)
Non-accrual loans $ 7,088 $ 5,611
Past due loans 90 days or
more and still accruing 340 2,439
Other real estate owned
and repossessions 64 24
-------- --------
Total non-performing assets $ 7,492 $ 8,074
======== ========
Percent of total assets .97% 1.11%
19
Table 8: Activity in Allowance for Loan Losses
Three Months Ended
March 31,
2003 2002
--------- ---------
(dollars in thousands)
Balance at beginning of year $ 6,574 $ 5,205
Loans charged-off:
Commercial 425 211
Mortgage (including home equity) 102 67
Consumer 178 93
Credit card 16 20
--------- ---------
Total loans charged-off (721) (391)
Recoveries on loans previously charged-off:
Commercial 6 2
Mortgage (including home equity) - 26
Consumer 13 27
Credit card 1 2
--------- ---------
Total loan recoveries 20 57
--------- ---------
Net loans charged-off (701) (334)
--------- ---------
Provision for loan losses charged to expense 675 500
--------- ---------
Ending balance $ 6,548 $ 5,371
========= =========
Total loans outstanding $ 605,962 $ 519,901
Average loans outstanding $ 604,042 $ 514,332
Allowance for loan losses to loans outstanding 1.08% 1.03%
Net charge-offs to average loans outstanding, annualized 0.47% 0.26%
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 $57.1 million at March 31, 2003, an increase of 15% from $49.7
million at the end of 2002.
Securities are classified as either held-to-maturity or available-for-sale.
At March 31, 2003 investment securities available-for-sale made up 100% of the
total investment portfolio of $57.1 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 deferred income tax, as accumulated other comprehensive income (loss). Also
included in other comprehensive income (loss) are accumulated net gains (losses)
on cash flow hedges. At March 31, 2003, accumulated other comprehensive income
(loss) was ($22,000), compared to $108,000 at December 31, 2002.
The Company primarily invests 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 government. In addition, the
Company enters into federal funds transactions with its principal correspondent
banks. The Federal Reserve Bank and FHLB also require equity investments to be
maintained by the Company.
20
The following tables set forth the maturity distribution and the weighted
average yields of the Company's investment portfolio.
Table 9: Maturity Distribution of Investment Securities (1)
March 31, 2003
(dollars in thousands) Held to Maturity Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
U.S. Treasury:
One year or less $ - $ - $ 4,059 $ 4,057
-------------- -------------- ------- -------
Total U.S. Treasury - - 4,059 4,057
U.S. Government Agencies and Corporations (2):
One year or less - - 14,027 14,513
Over one through five years - - 6,986 7,018
Over five through ten years - - 10,000 10,000
-------------- -------------- ------- -------
Total U.S. Government Agencies - - 31,013 31,531
and Corporations
Obligations of State and Political
Subdivisions:
Over ten years - - 2,174 2,219
-------------- -------------- ------- -------
Total Obligations of State and - - 2,174 2,219
Political Subdivisions
Mortgage-Backed Securities (3):
Over one through five years - - 16 16
Over five through ten years - - 5,081 5,137
Over ten years - - 10,960 11,001
-------------- -------------- ------- -------
Total Mortgage-Backed Securities - - 16,057 16,154
Other Securities (4):
Over ten years - - 3,119 3,119
-------------- -------------- ------- -------
Total Other Securities - - 3,119 3,119
-------------- -------------- ------- -------
Total Securities $ - $ - $56,422 $57,080
============== ============== ======= =======
- ----------
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Includes securities issued through government agencies that are callable at
various times by the issuer prior to the stated maturity date. At March 31,
2003, such callable securities had an amortized cost of $27.0 million and
an estimated fair market value of $27.5 million.
(3) Represents investments in mortgage-backed securities which are subject to
early repayment.
(4) Represents investment in Federal Reserve Bank and Federal Home Loan Bank
stock and other marketable equity securities.
Table 10: Weighted Average Yield by Range of Maturities
March 31, 2003 December 31, 2002 March 31, 2002
-------------- ----------------- --------------
One Year or Less 4.21% 2.41% 2.27%
More than One through Five Years 2.97% 4.87% 5.08%
More than Five through Ten Years 4.59% 4.48% 4.99%
More than Ten Years (1) 4.02% 4.46% 4.56%
- ----------
(1) Represents adjustable rate mortgage-backed securities which are repriceable
within one year.
21
Other Earning Assets
Temporary investment needs are created in the day-to-day liquidity movement
of the Bank and are satisfied by selling excess funds overnight (Fed Funds Sold)
to larger, well capitalized banking institutions. If these funds become
excessive, management determines what portion, if any, of the liquidity may be
rolled into longer term investments as securities.
FUNDING SOURCES
Deposits
The Bank does not rely on purchased or brokered deposits as a source of
funds. Instead, competing for deposits within its market area serves as the
Bank's fundamental tool in providing a source of funds to be invested primarily
in loans. The following table sets forth certain deposit categories for the
periods ended March 31, 2003 and December 31, 2002.
Table 11: Total Deposits
March 31, December 31,
2003 2002
----------- ------------
(thousands)
Non-interest bearing:
Demand checking $ 90,539 $ 80,065
Interest bearing:
NOW checking 132,729 118,619
Money market checking 97,127 95,354
Savings 23,936 22,311
Certificates of deposit 350,485 332,287
-------- --------
Total deposits $694,816 $648,636
======== ========
CAPITAL RESOURCES
Shareholders' equity at March 31, 2003 was $51.6 million, as compared to
$50.9 million at December 31, 2002. During the first quarter of 2003, the Board
of Directors declared dividends totaling $0.06 per share (payable May 2, 2003),
an increase of 20% from the fourth quarter 2002 dividend. At March 31, 2003, the
Company's common stock had a book value of $8.40 per share compared to $8.31 per
share at December 31, 2002.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy guidelines,
the Company must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
component, risk weightings and other factors.
Quantitative measures as defined by regulation and established to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios of
Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average
assets. If such minimum amounts and ratios are met, the Bank is considered
"adequately capitalized." If a bank exceeds the requirements of "adequately
capitalized" and meets even more stringent minimum standards, it is considered
to be "well capitalized." As of March 31, 2003, the Bank met all capital
adequacy requirements to which it is subject.
22
At March 31, 2003 and 2002, the Company's Tier 1 capital, Total risk-based
capital and Tier 1 leverage ratios were are as follows:
Table 12: Capital Ratios
March 31, Well-Capitalized Regulatory
2003 2002 Requirements Minimums
------------ ------------ ------------ --------
Risk Based Capital Ratios:
Tier 1 Capital Ratio 7.7% 7.8% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 8.8% 8.9% 10.0% 8.0%
Tier 1 Leverage Ratio 6.1% 6.6% 5.0% 4.0%
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the
portrayal of the Company's financial condition and requires management's most
difficult, subjective or complex judgments. The circumstances that make these
judgments difficult, subjective or complex have to do with the need to make
estimates about the effect of matters that are inherently uncertain. The
Company's considers the establishment and maintenance of the allowance for loan
loss and the accounting for its core deposit intangible asset to be critical
accounting policies.
The allowance for loan loss is established through a provision for loan
loss charged to expense. Loans are charged against the allowance for loan loss
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
inherent losses on existing loans that may become uncollectible based on
evaluations of the collectibility of the loans. The evaluations take into
consideration such objective factors as changes in the nature and volume of the
loan portfolio 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,
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
March 31, 2003, the performance of the depositor relationships did not differ
materially from expectations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
On January 28, 1997, the Securities and Exchange Commission adopted
amendments to Regulation S-K, Regulation S-X, and various forms to clarify and
expand existing requirements for disclosures about derivatives and market risks
inherent in derivatives and other financial instruments. As noted below, at
March 31, 2003, 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.
23
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 March 31,
2003 was approximately ($693,000). The swap is being accounted for as a cash
flow hedge of the variable interest payments under the $10 million term debt.
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
March 31, 2003, 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 March 31, 2003 would not necessarily be considered
to apply at subsequent dates.
24
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - There are no material pending legal proceedings to
which the Company or any of its subsidiaries is a party or of which any
of their property is the subject.
Item 2. Changes in Securities and Use of Proceeds - Not applicable.
Item 3. Defaults Upon Senior Securities - Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders - Not
applicable.
Item 5. Other Information - Not applicable.
Item 6. Exhibits and Reports on Form 8-K -
(a) Exhibits:
99.1 Chief Executive Officer certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On January 28, 2003, the Company filed a Form 8-K to report its 2002
fourth quarter and full year results.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNB Florida Bancshares, Inc.
----------------------------
(Registrant)
By: /s/ G. Thomas Frankland
---------------------------------------
G. Thomas Frankland
Executive Vice President
and Chief Financial Officer
Date: May 14, 2003
26
CERTIFICATIONS
I, K. C. Trowell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Florida
Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to us by
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ K. C. Trowell
--------------------------------
K. C. Trowell
Chairman of the Board, President
and Chief Executive Officer
27
I, G. Thomas Frankland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Florida
Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to us by
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ G. Thomas Frankland
-----------------------
G. Thomas Frankland
Executive Vice President and
Chief Financial Officer
28