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, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No: 0-25988
CNB Florida Bancshares, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-2958616
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9715 Gate Parkway North
Jacksonville, Florida 32246
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 997-8484
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
Par value $ 0.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $60,174,343.90 (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 30, 2003 of $15.65 per share).
The number of shares of the Registrant's common stock outstanding as of March 5,
2004 was 6,256,662 shares, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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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
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .......................12
Item 6. Selected Financial Data .....................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......14
Overview ....................................................................................14
Results of Operations .......................................................................15
Income Taxes ................................................................................19
Liquidity....................................................................................19
Obligations and Commitments..................................................................20
Interest Rate Sensitivity....................................................................20
Earning Assets...............................................................................24
Loan Quality ................................................................................25
Investment Portfolio ........................................................................27
Capital Resources ...........................................................................29
Quarterly Financial Information .............................................................30
Item 7a. Quantitative and Qualitative Disclosure About Market Risk ...................................33
Critical Accounting Policies ................................................................33
Item 8. Consolidated Financial Statements ...........................................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........69
Item 9a Controls and Procedures......................................................................69
PART III
Item 10. Directors and Executive Officers of the Registrant ..........................................70
Item 11. Executive Compensation ......................................................................75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters .....................................................................................79
Item 13. Certain Relationships and Related Transactions ..............................................80
Item 14. Principal Accountant Fees and Services ......................................................80
PART IV
Item 15. Exhibits and Reports on Form 8-K ............................................................81
SIGNATURES AND CERTIFICATIONS
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PART I
ITEM 1. 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 and other SEC filings 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 Part II of this Form 10-K.
On January 21, 2004, the Company announced that it had entered into a
definitive agreement to be acquired by The South Financial Group, Inc. in an
all-stock transaction. Under terms of the agreement, the Company's shareholders
will receive 0.84 shares of The South Financial Group, Inc. common stock for
each CNB Florida Bancshares, Inc. share. In addition, outstanding options to
purchase the Company's stock will be converted into options to acquire The South
Financial Group, Inc.'s common stock at the 0.84 exchange ratio. The transaction
is expected to close in July 2004 and is subject to regulatory and Company
shareholder approval. The Company's subsidiary, CNB National Bank, will merge
into The South Financial Group, Inc.'s Florida banking subsidiary, Mercantile
Bank.
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 sixteen 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,
2003, the Company had total assets of $819.9 million, total gross loans of
$681.8 million, total deposits of $723.7 million, and total shareholders' equity
of $56.4 million. Net income for the years ended December 31, 2003, 2002 and
2001 was $6.6 million, $5.4 million and $2.9 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.
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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 against larger bank holding companies for
middle market customers in Columbia, Suwannee, Baker, Bradford and Union
Counties (the "Core Markets"). In the Company's Expansion Markets, many of these
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
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 and Expansion Markets, primarily with SunTrust
Banks, Bank of America, Wachovia, SouthTrust, AmSouth and Compass, all of which
are headquartered outside of Florida.
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. The Company believes that this strategy will continue to be pursued
subsequent to its expected acquisition by The South Financial Group, Inc. in
July 2004. CNB National Bank will be merged into The South Financial Group,
Inc.'s Florida banking subsidiary, Mercantile Bank. The combined banking
subsidiary will be headquartered in Florida and will continue to stress a
locally-driven, personalized approach to banking services.
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. The pending merger of CNB into Mercantile Bank will further increase
the institutional capital platform and asset size needed to expand our customer
base and deepen existing banking relationships.
PROVIDE COMMUNITY BANKING SERVICE
The Company believes that it can achieve the goals outlined above through a
continued commitment to the "community bank philosophy," which emphasizes
offering a broad range of personalized products and services through banking
professionals who understand the banking industry and the banking needs of the
local communities they serve. Each branch manager and individual loan officer is
given a certain degree of authority and discretion to approve loans and to price
loans and services in order to respond quickly and efficiently to the needs of
the Company's customers. In implementing this strategy, the Company combines 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 is pursuing this strategy
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throughout its Core and Expansion Markets and operates a multi-office community
bank that emphasizes decision-making at the local level.
To ensure that the Company's expansion does not erode its standards for
service and quality, the Company created four operating divisions: the Southern
Division (Alachua County), the TriCounty Division (Baker, Bradford and Union
Counties), the Suwannee Valley Division (Columbia and Suwannee Counties) and the
First Coast Division (Duval and St. Johns Counties). This organizational
structure helps 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.
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
5
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 through a third
party financial institution. Credit decisions and credit risk are handled
entirely by the third party institution except in situations where the Company
has overridden a decision to decline the extension of credit. In such cases the
Company bears full recourse on the account.
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
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
6
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 loss 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 brand, 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 and
transacted through Raymond James that were originated through CNB Financial
Services. This business unit did not materially contribute to the Company's
results of operations during 2001, 2002 or 2003.
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 loss to outstanding and
nonperforming loans, and other variables, such as expected loan demand,
investment opportunities, core deposit growth within specified categories,
regulatory changes, capital levels, 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 and other interest bearing deposit transactions with its
principal correspondent banks. Other investments consist primarily of Federal
Reserve Bank and Federal Home Loan Bank stock that are required for the Bank to
be a member of, and to conduct business with, such institutions. Dividends on
such investments are determined by the institutions and are payable
semi-annually or quarterly.
COMPETITION
Within each market 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
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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 services firms.
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. The Bank opened two branches during 2003, one each in Gainesville and
Glen St. Mary.
As previously noted, on January 21, 2004, the Company announced that it had
entered into a definitive agreement to be acquired by The South Financial Group,
Inc. The transaction is expected to close in July 2004 and is subject to
regulatory and Company shareholder approval. The Company's subsidiary, CNB
National Bank, will merge into The South Financial Group, Inc.'s Florida banking
subsidiary, Mercantile Bank.
EMPLOYEES
As of December 31, 2003, the Bank had 265 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
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.
8
The 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 Company may be required to provide financial
support for a subsidiary bank at a time where absent such Federal Reserve
policy, the 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 authorizes 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 to be
closely related to banking and permissible for bank holding companies.
Pursuant to the Interstate Banking and Branching Act, bank holding
companies are able to acquire banks in states other than their respective home
states, without regard to the permissibility of such acquisitions under state
laws. The transaction would still be subject to any state requirement that the
Bank has been organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the respective bank holding company,
prior to or following the proposed acquisition, controls no more than 10% of the
total amount of deposits of insured depository institutions in the United States
and less than 30% of such deposits in that state (or such lesser or greater
amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. Florida does not
prohibit interstate branching within the state. Furthermore, pursuant to the
Interstate Banking and Branching Act, a bank is now able to open new branches in
a state in which it does not already have banking operations if such state
enacts a law permitting de novo branching.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on the Company
and the Bank cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve, the Comptroller and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, those regulatory agencies may from time to
time require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth. The Federal Reserve risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for credit losses up to 1.25% of risk-weighted assets. The sum of Tier 1 and
Tier 2 capital less investments in unconsolidated subsidiaries represents
qualifying total capital, at least 50% of which must consist of Tier 1 capital.
Risk-based capital ratios are calculated by dividing Tier 1 and total capital by
risk-weighted assets. Assets and off-balance sheet exposures are assigned to one
of four categories of risk weights, based primarily on relative credit risk. The
minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%.
The Company's Tier 1 and total risk-based capital ratios under these guidelines
at December 31, 2003, were 7.8% and 8.9%, respectively.
9
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 this level. The Company's leverage ratio at December 31, 2003 was
6.4%. 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 and for payments on its borrowings is dividends received from the
Bank. The Bank is subject to various general regulatory policies and
requirements relating to the payment of dividends, including requirements to
maintain capital above regulatory minimums. The appropriate federal regulatory
authority is authorized to determine under certain circumstances relating to the
financial condition of the bank or bank holding company that the payment of
dividends would be an unsafe or unsound practice and to prohibit payment of
dividends.
In addition to the foregoing, the ability of the Company and the Bank to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of the Bank is further
subject to the prior claims of creditors of the Bank.
"SOURCE OF STRENGTH" POLICY
According to Federal Reserve policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank.
10
ITEM 2. PROPERTIES
The Bank currently operates out of sixteen 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
4917 E. U.S. Hwy 90 (2) .................................................... 20,800 1996
LIVE OAK (SUWANNEE COUNTY)
205 White Avenue, S.E ...................................................... 6,000 1988
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
6953 E. Mount Vernon Street ................................................ 4,500 2003
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 in Gainesville, which
opened in July 2003.
ITEM 3. 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.
ITEM 4. 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.
PART II
ITEM 5. 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 5, 2004, there were 6,256,662
shares of Common Stock issued and outstanding and 482 shareholders of record. In
addition, there were 482,550 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, 2003 was $56.4 million, as compared to
$50.9 million at December 31, 2002.
Company dividends for 2003 consisted of the payment of quarterly cash
dividends in the amount of $0.06 per common share. Cash dividends for 2002 and
2001 consisted of quarterly cash dividend payments 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 borrowings 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.
12
ITEM 6. SELECTED FINANCIAL DATA
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
Dollars in thousands except per share 2003 2002 2001 2000 1999
information
- --------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
Interest Income $ 43,530 $ 41,398 $ 40,417 $ 32,061 $ 23,758
Interest Expense (15,532) (15,646) (19,629) (14,736) (9,052)
---------- ---------- ---------- ---------- ----------
Net Interest Income 27,998 25,752 20,788 17,325 14,706
Provision for Loan Loss (2,100) (2,375) (2,050) (1,350) (1,160)
---------- ---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Loss 25,898 23,377 18,738 15,975 13,546
Non-Interest Income 6,219 6,304 5,633 3,338 2,952
Non-Interest Expense (21,707) (21,156) (19,836) (15,481) (11,994)
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes 10,410 8,525 4,535 3,832 4,504
Income Taxes (3,833) (3,141) (1,594) (1,325) (1,563)
---------- ---------- ---------- ---------- ----------
Net Income $ 6,577 $ 5,384 $ 2,941 $ 2,507 $ 2,941
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Basic Earnings $ 1.06 $ 0.88 $ 0.48 $ 0.41 $ 0.49
Diluted Earnings 1.03 0.87 0.48 0.41 0.48
Book Value 9.01 8.31 7.64 7.32 7.04
Dividends 0.24 0.20 0.20 0.20 0.20
Actual Shares Outstanding 6,256,662 6,125,500 6,106,453 6,099,376 6,116,070
Basic Weighted Average Shares
Outstanding 6,199,416 6,104,050 6,094,670 6,095,471 5,995,474
Diluted Weighted Average Shares
Outstanding 6,398,930 6,215,775 6,188,477 6,134,270 6,069,737
- --------------------------------------------------------------------------------------------------------------------
KEY RATIOS:
Return on Average Assets 0.83% 0.81% 0.53% 0.62% 0.91%
Return on Average Shareholders' Equity 12.27 11.03 6.43 5.74 7.03
Dividend Payout 22.43 22.73 41.67 48.78 40.82
Efficiency Ratio 63.44 66.00 75.08 74.92 67.92
Total Risk-Based Capital Ratio 8.92 8.52 9.00 12.00 17.25
Average Shareholders' Equity to Average
Assets 6.80 7.37 8.23 10.82 13.01
Tier 1 Capital to Average Assets/Leverage
Ratio 6.37 6.31 6.50 9.80 12.70
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION AT YEAR END:
Assets $ 819,935 $ 730,674 $ 612,021 $ 467,593 $ 346,076
Gross Loans 681,750 605,785 511,647 379,859 266,084
Deposits 723,686 648,636 532,891 367,686 288,203
Borrowings 34,050 25,446 28,148 51,142 12,063
Shareholders' Equity 56,387 50,921 46,669 44,636 43,075
- --------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Banking Locations 16 14 15 12 12
Full-Time Equivalent Employees 265 253 246 212 183
- --------------------------------------------------------------------------------------------------------------------
13
ITEM 7. 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.
Pending Acquisition
On January 21, 2004, the Company announced that it had entered into a
definitive agreement to be acquired by The South Financial Group, Inc. in an
all-stock transaction. Under terms of the agreement, the Company's shareholders
will receive 0.84 shares of The South Financial Group, Inc. common stock for
each CNB Florida Bancshares, Inc. share. In addition, outstanding options to
purchase the Company's stock will be converted into options to acquire The South
Financial Group, Inc.'s common stock at the 0.84 exchange ratio. The transaction
is expected to close in July 2004 and is subject to regulatory and Company
shareholder approval. The Company's subsidiary, CNB National Bank, will merge
into The South Financial Group, Inc.'s Florida banking subsidiary, Mercantile
Bank.
Overview
The following analysis reviews important factors affecting the financial
condition and results of operations of the Company 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 2003 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 officially relocated its corporate offices from Lake City to
Jacksonville effective January 2001. Operational headquarters for CNB National
Bank continue to be located in Lake City.
The Company continues to execute its strategic growth initiatives that were
put in place in connection with its initial public offering. During 2003 the
Company opened a new branch in Glen St. Mary and a branch in the Magnolia Parke
section of Gainesville. In 2001 the Company added two branches to its First
Coast market (Jacksonville and St. Augustine) and acquired two branches from
14
Republic Bank (Lake City and Live Oak). The branch acquisitions occurred in May
2001 and resulted in the 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.
As a continued result of these growth initiatives, the Company increased
net income, net loans and deposits from 2002 to 2003 by 22%, 13% and 12%,
respectively. In addition, the Company was able to effectively manage its
overall credit quality and reduce nonperforming assets from $8.1 million at
December 31, 2002 to $3.8 million at December 31, 2003. Net charge-offs
increased slightly from 0.18% of average loans in 2002 to 0.21% of average loans
in 2003. A more detailed discussion of the Company's financial performance in
2003 follows.
Results of Operations
The Company's earnings for 2003 were $6.6 million, or $1.03 per diluted
share, compared to $5.4 million, or $0.87 per diluted share, and $2.9 million,
or $0.48 per diluted share, in 2002 and 2001, respectively. These results
reflect an increase in net interest income due to loan and deposit growth, as
well as increases in deposit fees and other charges. In addition, the Company
was able to effectively manage its non-interest expense, which decreased from
3.57% of average assets in 2001 to 3.19% of average assets in 2002 and 2.76% of
average assets in 2003. Total assets increased to $819.9 million at December 31,
2003 compared to $730.7 million at December 31, 2002, an increase of 12%. The
increase in assets is attributable to a $75.2 million increase in net loans and
a $38.7 million increase in investment securities. These increases were
partially offset by a $15.5 million decrease in cash and cash equivalents and a
$9.8 million decline in loans held for sale. The increase in assets was largely
funded through a $75 million increase in deposits and an $8.1 million increase
in repurchase agreements.
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, liquidity and
capital risks. Net interest income was $28.0 million for 2003, compared to $25.8
million and $20.8 million for the comparable prior year periods of 2002 and
2001, respectively. The increase over 2002 was due to growth in loans,
securities and demand deposits. These increases were partially offset by lower
rates and spreads and an increase in time deposits. Net interest yield was 3.91%
in the fourth quarter 2003 compared to 4.06% in the fourth quarter 2002, and
3.80% for the year ended December 31, 2003 compared to 4.24 % for 2002. The
Company believes that its efforts to reduce the impact of margin compression
from the current interest rate environment have been successful. While the
Company continues to maintain an asset sensitive position with respect to asset
and liability management, it is anticipated that market interest rates will
remain at current low levels well into 2004.
Average earning assets increased $128.6 million, or 21%, during 2003 as
compared to 2002. The increase was due to growth in loans, securities and
interest bearing deposits of $78.8 million, $23.4 million and $22.5 million,
respectively. Increases in time, money market and NOW accounts were the main
contributors to the $107.3 million, or 20%, growth in average interest bearing
liabilities.
Table 1 presents average balances, yields and rates for the Company's
earning assets and interest bearing liabilities for 2003, 2002 and 2001. Table
1a shows the changes in net interest income by category due to shifts in volume
and rates for the years presented.
15
Table 1: Average Balances, Yields and Rates
December 31, 2003 December 31, 2002 December 31, 2001
----------------------------- ------------------------------ --------------------------------
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 $ 8,522 $ 92 1.08% $ 4,697 $ 73 1.55% $ 2,773 $ 102 3.68%
Investment Securities
Available for Sale 59,185 2,044 3.45 43,984 1,891 4.30 33,167 1,864 5.62
Investment Securities
Held to Maturity 9,906 572 5.77 1,667 99 5.94 6,278 384 6.12
Loans (1) 632,254 40,504 6.41 553,476 39,275 7.10 458,023 38,055 8.31
Interest Bearing Deposits 26,106 318 1.22 3,559 60 1.69 401 12 2.99
-------- ------- ---- -------- -------- ---- -------- --------- ----
TOTAL EARNING ASSETS 735,973 43,530 5.91 607,383 41,398 6.82 500,642 40,417 8.07
All Other Assets 51,904 55,173 55,233
-------- -------- --------
TOTAL ASSETS $787,877 $662,556 $555,875
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $241,658 3,613 1.50% $192,108 3,432 1.79% $148,026 3,899 2.63%
Savings 24,371 102 0.42 21,907 155 0.71 18,707 196 1.05
Time Deposits 345,425 11,016 3.19 291,205 11,213 3.85 235,010 13,656 5.81
Federal Funds Purchased and
Repurchase Agreements 13,100 114 0.87 13,174 191 1.45 14,609 552 3.78
Short Term Borrowings 1,212 33 2.72 33 1 3.04 20,932 1,061 5.07
Other Borrowings (2) 10,000 654 6.54 10,000 654 6.54 4,667 265 5.68
-------- ------- ---- -------- -------- ---- -------- --------- ----
TOTAL INTEREST BEARING
LIABILITIES 635,766 15,532 2.44 528,427 15,646 2.96 441,951 19,629 4.44
Demand Deposits 92,737 80,302 64,337
Other Liabilities 5,776 4,999 3,838
Shareholders' Equity 53,598 48,828 45,749
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $787,877 $662,556 $555,875
======== ======== ========
---- ---- ----
INTEREST SPREAD (3) 3.47% 3.86% 3.63%
==== ==== ====
------- -------- ---------
NET INTEREST INCOME $27,998 $ 25,752 $ 20,788
======= ======== =========
NET INTEREST MARGIN (4) 3.80% 4.24% 4.15%
==== ==== ====
- --------------------
(1) Interest income on average loans includes net loan fee recognition of
$512,000, $494,000 and $979,000 in 2003, 2002 and 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.
16
Table 1a: Analysis of Changes in Interest Income and Expense
NET CHANGE DECEMBER 31, NET CHANGE DECEMBER 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 $ 59 $ (40) $ 19 $ 71 $ (100) $ (29)
Investment Securities Available for Sale 654 (501) 153 608 (581) 27
Investment Securities Held to Maturity 489 (16) 473 (282) (3) (285)
Loans 5,590 (4,361) 1,229 7,930 (6,710) 1,220
Interest Bearing Deposits 380 (122) 258 94 (46) 48
------- ------- ------- ------- ------- -------
Total 7,172 (5,040) 2,132 8,421 (7,440) 981
INTEREST EXPENSE:
NOW & Money Markets 885 (704) 181 1,162 (1,629) (467)
Savings 17 (70) (53) 34 (75) (41)
Time Deposits 2,088 (2,285) (197) 3,266 (5,709) (2,443)
Federal Funds Purchased and Repurchase Agreements (1) (76) (77) (54) (307) (361)
Short Term Borrowings 36 (4) 32 (1,059) (1) (1,060)
Other Borrowings - - - 304 85 389
------- ------- ------- ------- ------- -------
Total 3,025 (3,139) (114) 3,653 (7,636) (3,983)
------- ------- ------- ------- ------- -------
Net Interest Income $ 4,147 $(1,901) $ 2,246 $ 4,768 $ 196 $ 4,964
======= ======= ======= ======= ======= =======
- ---------------
(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 $6.2 million in 2003, a decline of 1% from
2002, and a 12% increase from 2001. The decrease was primarily attributed to a
$775,000 decrease in secondary marketing mortgage sale income. The lower level
of secondary market mortgage income is attributable to reduction in loan
production staff resulting from organizational changes within the mortgage
function and a lower loan origination volume stemming from an increase in the
level of mortgage interest rates during the second half of 2003. This decrease
was partially offset by an increase in service charges on deposit accounts of
$321,000 or 10% in 2003, compared with $299,000 or 10% in 2002 and a $211,000
increase in gains on the sale of investment securities during 2003. The
securities sold were short dated, callable agency debt instruments with premiums
resulting from continued interest rate declines and were sold as a partial hedge
of the continued margin compression. Other non-interest income, which includes
credit card fees, credit life insurance income, safe deposit box fees, discount
brokerage fees, and other miscellaneous fees, increased $158,000 in 2003
compared to $100,000 in 2002. A portion of the increase from 2002 was due to the
recognition of a $55,000 gain on the sale of the Company's credit card portfolio
during the third quarter of 2003.
Non-interest income as a percentage of average assets was 0.79% in 2003
compared to 0.95% and 1.01% in 2002 and 2001, respectively.
Non-Interest Expense
Non-interest expense increased $551,000, or 3%, for 2003, compared to an
increase of $1.3 million, or 7%, for 2002. During 2003, non-interest expense as
a percentage of average assets decreased to 2.76%, compared to 3.19% and 3.57%
in 2002 and 2001, respectively.
Salaries and employee benefits for 2003 decreased $16,000 from 2002
compared to an increase of $843,000 from 2001. The decrease in salaries and
benefits expense from 2002 to 2003 was due to management of headcount and a
reduction in commission expense reflecting the decline in secondary market
mortgage loan sales. As a percentage of average total assets, salaries and
employee benefits have decreased to 1.41% in 2003 compared to 1.67% and 1.84% in
17
2002 and 2001, respectively.
Occupancy expenses (including furniture, fixtures & equipment) increased to
$3.6 million in 2003 compared to $3.4 million in 2002 and $3.1 million in 2001.
The increase is attributable to the opening of two branches in 2003 - Glen St.
Mary (Baker County) and Magnolia Parke (Alachua County) - and increased
depreciation expense on computer hardware and software enhancements. The
increase in 2002 compared to 2001 was due to a full year of depreciation for the
Operations Center and the two purchased Republic branches.
Other operating expenses at CNB increased 6% in 2003 compared to 2002 and
3% in 2002 compared to 2001. The increase in 2003 was attributable to: (1) an
increase of $186,000 in data processing fees resulting from higher core
processing expenses associated with higher transaction volume and costs
associated with information technology enhancements; (2) an increase of $74,000
in legal and professional fees due to expenses associated with resolving
nonperforming loans and outsourcing of certain information technology risk
management and internal audit functions; and (3) an increase of $98,000 in other
expenses primarily due to a $63,000 loss on the sale of certain bank real estate
in the second quarter of 2003. The increases in these areas were offset by
decreases in communications, amortization of intangible assets, supplies and
education expenses. The increase in other operating expenses in 2002 was due to
a $224,000 increase in data processing fees resulting from higher transaction
volumes handled by our core processor; an increase of $169,000 in communications
expenses, primarily due to an enhancement of bandwidth capacity between each of
the Company's branches; an increase of $203,000 in amortization of intangible
assets due to the core deposit amortization on the Republic branches for a full
year and a $71,000 increase in legal and professional costs. The 2002 increases
were offset by decreases in advertising, administrative, supplies and other
operating expenses.
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,
2003 2002 2001
------ ------ ------
Data processing $1,514 $1,328 $1,104
Legal and professional 763 689 618
Communications 747 764 595
Postage and delivery 739 700 671
Amortization of intangible assets 712 746 543
Advertising and promotion 553 532 687
Supplies 387 410 578
Regulatory fees 274 239 255
Loan expenses 260 242 248
Administrative 164 163 211
Director fees 105 88 70
Education expense 100 131 101
Insurance and bonding 98 76 105
Dues and subscriptions 83 97 100
Other general operating 78 79 67
Other 448 350 518
------ ------ ------
Total other operating expenses $7,025 $6,634 $6,471
====== ====== ======
18
Income Taxes
The effective tax rate for the year ended December 31, 2003 was 36.8%,
compared to 36.8% for 2002 and 35.2% for 2001. The consolidated provision for
income taxes increased to $3.8 million in 2003, compared to $3.1 million in 2002
and $1.6 million in 2001. The primary difference between the Company's effective
tax rate and the statutory federal income tax rate is due to tax-exempt income
on certain loans and securities and state income taxes. A reconciliation of the
effective income tax rate to the statutory rate is included in Note 10 of Notes
to Consolidated Financial Statements included in Item 8 of Part II of this Form
10-K.
Liquidity
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 regular basis. These funds can be obtained by
converting assets to cash, attracting new deposits or utilizing existing
borrowing capacity. 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 $113.6 million and represented 16.1% of
average total deposits during 2003, compared to $69.8 million and 11.9% for
2002. The Company's loan to deposit ratio at December 31, 2003 was 94%, compared
to 93% at the end of 2002.
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 of Atlanta 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
subject to annual renewal (currently extended through June 30, 2004) 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 April 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, 2003 was approximately ($508,000). There was $1.5 million outstanding on the
$3 million line of credit on December 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:
19
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 borrowing 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, 2003, the Company was in compliance with all
covenants.
The level of commitments to fund additional borrowings and standby letters
of credit also impacts the Company's liquidity position. These commitments, when
drawn, are generally funded through deposit inflows, loan and investment
maturities, interest receipts and, to the extent necessary, short term purchases
of federal funds. The Company's borrowing capacity with 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 $193,860,000 and $8,303,000,
respectively, at December 31, 2003 and expire as outlined in the table below (in
thousands):
Unfunded Standby
Commitments Letters of Credit
----------- -----------------
2004 $ 38,909 $ 7,327
2005 50,449 711
2006 30,056 265
2007 15,785 -
2008 20,111 -
Thereafter 38,550 -
-------- --------
$193,860 $ 8,303
======== ========
Obligations and Commitments
The following table presents the Company's contractual obligations at
December 31, 2003:
Payments due by period
(in thousands)
---------------------------------------------------------------------------
Less than 1-3 3-5 More than
1 year years years 5 years Total
------- ------- -------- --------- -------
Long-Term Debt Obligation $ 1,428 $ 8,572 $ - $ - $10,000
Line of Credit Obligation 1,500 - - 1,500
Operating Lease Obligations 376 638 484 614 2,112
Purchase Obligations 1,129 1,761 - - 2,890
------- ------- ------- ------- -------
Total: $ 4,433 $10,971 $ 484 $ 614 $16,502
======= ======= ======= ======= =======
Long-term debt and line of credit obligations relate to the Company's
borrowing arrangement with another financial institution as more fully described
in Liquidity above and in Note 8 - Other Borrowings of Notes to Consolidated
Financial Statements in Item 8 of Part II of this Form 10-K. Operating lease
obligations represent contractual commitments to make payments under leases for
certain branch equipment and related properties. The Company does not have any
capital leases obligations. Purchase obligations are defined as contractual
obligations to purchase products or services from unaffiliated parties with a
specific minimum quantity defined at a fixed, minimum or variable price over
time. The Company's primary purchase obligation relates to certain core
processing services provided by an unaffiliated vendor. The services provided to
the Company relate to critical front and back office data processing
applications. The term of the contract runs through June 30, 2006 and has
pricing provisions that provide for certain minimum levels of account and
transaction volumes. To date, the level of services obtained under this contract
has exceeded such minimums. During 2003, the average monthly fee paid for these
services was approximately $91,000. For purposes of presenting contractual
commitments in the table above, the average monthly amount was projected to be
paid over the remaining term of the contract, subject to minimum pricing
increases as outlined in the agreement.
Interest Rate Sensitivity
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 between the volume of
rate-sensitive assets and liabilities, at a given time interval, including both
floating rate instruments and instruments that are approaching maturity.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize the
overall interest rate risk to the Company.
The Company's gap and liquidity positions are reviewed on a regular basis
by management to determine whether or not changes in policies and procedures are
necessary to achieve financial goals. 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, 2003, a gradual
increase in interest rates of 200 basis points would have increased net interest
income over the ensuing twelve-month period by 3.77%. A gradual decrease in
interest rates of 200 basis points over this same period would have decreased
net interest income by 5.19% as compared to a stable rate environment. At
20
December 31, 2002, the internal analysis estimated an increase in net interest
income of 3.76% and a decrease in net interest income of 3.83% for a similar 200
basis point increase and decrease in interest rates, respectively. The Company
maintained its overall asset sensitivity position as it continued to focus on
variable-rate lending and experience 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, 2003, the Bank's net economic value ratio was 8.73% and 9.23%, assuming a
gradual increase or decrease, respectively, in interest rates of 200 basis
points over a 12-month period. At December 31, 2002, the Bank's net economic
value ratio was 10.04% and 10.13% for similar changes in interest rates.
Table 3, "Rate Sensitivity Analysis" presents, for the years indicated,
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, 2003, the estimated fair
values would necessarily have been achieved at that date, since market values
may differ depending on various circumstances.
21
Table 3: Rate Sensitivity Analysis
December 31, 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 $131,547 $52,997 $46,702 $49,094 $55,172 $136,070 $471,582 $475,508
Average Interest Rate 6.07% 6.73% 6.71% 6.84% 6.29% 5.90% 6.26%
Variable Rate Loans 53,172 27,819 31,048 9,781 12,030 76,318 210,168 216,045
Average Interest Rate 4.39% 4.59% 4.57% 5.82% 5.88% 6.25% 5.27%
Investment Securities (1)
Fixed Rate Investments 4,006 - 1,506 4,000 1,113 74,815 85,440 84,778
Average Interest Rate 1.22% 1.50% 2.40% 4.11% 4.41% 4.11%
Variable Rate Investments - - - - - 340 340 350
Average Interest Rate 3.95% 3.95%
Federal Funds Sold - - - - - - - -
Average Interest Rate
Other Earning Assets (2) 4,028 - - - - - 4,028 4,028
Average Interest Rate 3.72% 3.72%
-------- ------- ------- ------- ------- -------- -------- --------
Total Interest-Earning Assets $192,753 $80,816 $79,256 $62,875 $68,315 $287,543 $771,558 $780,709
Average Interest Rate 5.46% 5.76% 5.77% 6.40% 6.18% 5.60% 5.72%
======== ======= ======= ======= ======= ======== ======== ========
INTEREST-BEARING LIABILITIES:
- -----------------------------
NOW $ 68,274 $ - $ - $ - $ - $ 65,485 $133,759 $133,759
Average Interest Rate 1.51% 0.20% 0.87%
Money Market 131,925 - - - - 3,873 135,798 135,798
Average Interest Rate 1.99% 0.95% 1.96%
Savings - - - - - 24,983 24,983 24,983
Average Interest Rate 0.35% 0.35%
CD's Under $100,000 117,486 34,339 15,446 5,816 365 - 173,452 175,109
Average Interest Rate 2.32% 3.69% 3.83% 3.60% 3.67% 2.77%
CD's $100,000 and Over 118,435 23,218 10,539 7,657 850 - 160,699 161,319
Average Interest Rate 2.70% 3.82% 3.69% 4.17% 4.34% 3.01%
Securities Sold Under
Repurchase Agreements and
Federal Funds Purchased 22,550 - - - - - 22,550 22,550
Average Interest Rate 0.69% 0.69%
Short Term Borrowings
Average Interest Rate 1,500 - - - - - 1,500 1,500
2.63% 2.63%
Other Borrowings (3) 1,428 1,428 7,144 - - - 10,000 10,000
Average Interest Rate 3.60% 3.60% 3.60% 3.60%
-------- ------- ------- ------- ------- -------- -------- --------
Total Interest-Bearing Liabilities $461,598 $58,985 $33,129 $13,473 $ 1,215 $ 94,341 $662,741 $665,018
Average Interest Rate 2.13% 3.74% 3.74% 3.92% 4.14% 0.27% 2.13%
======== ======= ======= ======= ======= ======== ======== ========
- ----------------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net unrealized losses of ($532,000).
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank
Stock, Federal Home Loan Bank Stock and other marketable equity securities.
(3) Other borrowings consist 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% (calculated on a 360 day year) and
receives a floating rate of interest of 3-month Libor plus 170 basis
points. Other terms of the swap mirror those of the term debt.
22
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 consist 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% (calculated on a 360 day year) 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.
23
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, averaged 76% of total average deposits in 2003 and 77% in
2002. 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, 2003
Amount
-----------
(thousands)
Three Months or Less $ 37,015
Three Through Six Months 28,520
Six Through Twelve Months 52,900
Over Twelve Months 42,264
--------
Total $160,699
========
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. Average loans for the year ended December 31, 2003 were $632.3
million, or 86% of average earning assets as compared to $553.5 million, or 91%
of average earning assets for 2002. The decline in loans as a percentage of
average earning assets is due to growth in deposit balances during 2003 that
outpaced net loan fundings. As a result, the Company deployed the excess funds
in investment securities, fed funds sold and interest bearing deposits with
banks, which increased from 9% of average earning assets in 2002 to 14% of
average earning assets in 2003.
As of December 31, 2003 the Company had total gross loans of $681.8
million, compared to $605.8 million at December 31, 2002, an increase of $76.0
million or 13%. The composition of the Company's loan portfolio for the past
five years is presented in Table 5.
Table 5: Loan Portfolio Composition
December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- -------- -------- --------
Commercial $ 120,033 $ 111,033 $ 95,112 $ 67,962 $ 41,745
Commercial real estate 365,911 324,525 252,295 181,831 115,633
Mortgages (including home equity) 157,325 132,513 123,503 97,220 68,343
Consumer 32,510 32,199 34,835 26,418 33,856
Credit card - 1,164 1,313 1,593 1,538
Tax free 5,971 4,351 4,589 4,835 4,969
--------- --------- --------- --------- ---------
Total loans, net of unearned discount 681,750 605,785 511,647 379,859 266,084
Less: Allowance for loan loss (7,329) (6,574) (5,205) (3,670) (2,671)
--------- --------- --------- --------- ---------
Net loans $ 674,421 $ 599,211 $ 506,442 $ 376,189 $ 263,413
========= ========= ========= ========= =========
Table 6 sets forth the maturity distribution for selected components of the
Company's loan portfolio as of December 31, 2003. Demand loans and overdrafts
are reported as due in one year or less, and loan maturity is based upon
scheduled principal payments.
24
Table 6: Maturity Schedule of Selected Loans
December 31, 2003
(in thousands)
0-12 1-5 Over 5
Months Years Years Total
-------- -------- -------- --------
Commercial $ 56,458 $ 49,945 $ 13,630 $120,033
Commercial real estate 91,488 167,881 106,542 365,911
Mortgages (including home equity) 23,084 45,729 88,512 157,325
Consumer 12,229 18,821 1,460 32,510
Tax free 1,460 2,267 2,244 5,971
-------- -------- -------- --------
Total $184,719 $284,643 $212,388 $681,750
======== ======== ======== ========
Fixed interest rate $131,547 $203,965 $136,070 $471,582
Variable interest rate $ 53,172 $ 80,678 $ 76,318 $210,168
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, 2003, the Bank's
four largest concentration categories are: Land Development ($37.4 million),
Professional ($32.4 million), Commercial Real Estate ($29.8 million) and
Commercial Construction ($24.2 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 decreased from $8.1 million at December 31, 2002 to $3.8
million at December 31, 2003. Non-performing assets as a percentage of total
assets decreased to 0.46% in 2003 from 1.11% in 2002. The decrease in
non-performing assets was primarily attributed to the resolution of a commercial
credit and two commercial real estate loans during 2003. The decrease in past
due loans 90 days or more and still accruing interest was largely due to the
payoff of a large commercial real estate loan during the fourth quarter of 2003.
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,
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(dollars in thousands)
Non-Accrual Loans $3,292 $5,611 $1,377 $ 579 $ 549
Past Due Loans 90 Days or
More and Still Accruing 387 2,439 1,271 840 180
Other Real Estate Owned &
Repossessions 133 24 229 56 102
------ ------ ------ ------ ------
Total Non-Performing Assets $3,812 $8,074 $2,877 $1,475 $ 831
====== ====== ====== ====== ======
Percent of Total Assets 0.46% 1.11% 0.47% 0.32% 0.24%
====== ====== ====== ====== ======
25
The allowance for loan loss is an amount that management believes is
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 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.
The allowance for loan loss on December 31, 2003, was $7.3 million, or
1.08% of total loans outstanding, net of unearned income compared to $6.6
million, or 1.09% on December 31, 2002. Table 8: "Allocation of Allowance for
Loan Loss," set forth below, indicates the specific reserves allocated by loan
type.
Table 8: Allocation of Allowance for Loan Loss
December 31,
2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
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 $6,033 44.6% $4,929 60.6% $3,669 54.8% $2,607 50.7% $1,670 51.5%
Real Estate - Construction 33 18.8% 27 8.7% 25 8.0% 15 8.9% 12 7.1%
Real Estate - Mortgage 613 30.3% 538 24.1% 484 29.0% 293 31.5% 220 32.4%
Consumer 650 6.3% 1,080 6.6% 932 8.2% 734 8.9% 769 9.0%
Unallocated - - - - 95 - 21 - - -
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $7,329 100% $6,574 100% $5,205 100% $3,670 100% $2,671 100%
====== === ====== === ====== === ====== === ====== ===
26
Table 9: "Activity in Allowance for Loan Loss" indicates activity in the
allowance for loan loss for the last five years.
Table 9: Activity in Allowance for Loan Loss
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(dollars in thousands)
Balance at Beginning of Year $ 6,574 $ 5,205 $ 3,670 $ 2,671 $ 1,875
Allowance Acquired by Acquisition - - 110 - -
Loans Charged-Off:
Commercial, Financial and Agricultural 778 756 410 75 312
Real Estate - Mortgage 125 71 59 40 13
Consumer 546 405 406 409 309
--------- --------- --------- --------- ---------
Total Loans Charged-Off (1,449) (1,232) (875) (524) (634)
Recoveries on Loans Previously Charged-Off:
Commercial, Financial and Agricultural 36 96 116 32 188
Real Estate - Mortgage 3 33 17 - -
Consumer 65 97 117 141 82
--------- --------- --------- --------- ---------
Total Loan Recoveries 104 226 250 173 270
--------- --------- --------- --------- ---------
Net Loans Charged-Off (1,345) (1,006) (625) (351) (364)
--------- --------- --------- --------- ---------
Provision for Loan Loss
Charged to Expense 2,100 2,375 2,050 1,350 1,160
--------- --------- --------- --------- ---------
Ending Balance $ 7,329 $ 6,574 $ 5,205 $ 3,670 $ 2,671
========= ========= ========= ========= =========
Total Loans Outstanding $ 681,750 $ 605,785 $ 511,647 $ 379,859 $ 266,084
Average Loans Outstanding $ 632,254 $ 553,476 $ 458,023 $ 317,345 $ 215,861
Allowance for Loan Loss
to Loans Outstanding 1.08% 1.09% 1.02% 0.97% 1.00%
Net Charge-Offs to
Average Loans Outstanding 0.21% 0.18% 0.14% 0.11% 0.17%
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 agreement, and to provide an
alternative investment for available funds. The total recorded value of
securities was $88.4 million at December 31, 2003, an increase of 78% from $49.7
million at December 31, 2002. As a percent of total earning assets, the
investment portfolio was 12% at December 31, 2003 compared to 8% at the end of
2002. The increase was primarily the result of deposit growth that outpaced the
growth in loans. A portion of these excess funds were deployed in investment
securities in order to take advantage of higher yields on funds that were not
expected to be immediately deployed into loans and to accommodate increasing
pledging needs.
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, 2003 investment securities available-for-sale made up 67% of the
total investment portfolio of $88.4 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. At December 31, 2003,
accumulated other comprehensive income included an unrealized loss, net of
taxes, of $333,000, compared to a $541,000 net unrealized gain at December 31,
2002 on securities available for sale. Also included in other comprehensive
income is the accumulated net loss on the Company's interest rate swap which is
accounted for as a cash flow hedge.
The Company invests primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States and
obligations of agencies of the United States. 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.
27
The following tables set 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, 2003
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 $ - $ - $ 4,006 $ 4,008
------- ------- ------- -------
Total U.S. Treasuries - - 4,006 4,008
U.S. Government Agencies
and Corporations (2):
Over One Through Five Years - - 5,506 5,437
Over Five Through Ten Years 7,500 7,496 10,000 10,034
Over Ten Years 17,500 17,374 10,000 9,494
------- ------- ------- -------
Total U.S. Government Agencies
and Corporations 25,000 24,870 25,506 24,965
Obligations of State and Political
Subdivisions:
Over Five Through Ten Years - - 608 636
Over Ten Years - - 1,560 1,596
------- ------- ------- -------
Total Obligations of State and
Political Subdivisions - - 2,168 2,232
Mortgage-Backed Securities (3):
Over One Through Five Years - - 1,113 1,131
Over Five Through Ten Years 4,536 4,546 15,868 15,816
Over Ten Years - - 7,583 7,560
------- ------- ------- -------
Total Mortgage-Backed Securities 4,536 4,546 24,564 24,507
Other Securities (4):
Over Ten Years - - 3,119 3,119
------- ------- ------- -------
Total Other Securities - - 3,119 3,119
Total Securities $29,536 $29,416 $59,363 $58,831
======= ======= ======= =======
- ----------------
(1) All securities, excluding Obligations of State and Political Subdivisions,
are taxable.
(2) Includes securities that may be callable prior to their stated maturity
date.
(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 10a: Weighted Average Yield by Range of Maturities
December 31,
2003 2002
---- ----
One Year or Less 1.22% 2.41%
Over One through Five Years 2.48 4.87
Over Five through Ten Years 3.98 4.48
Over Ten Years (1) 4.87 4.46
- ----------------
(1) Represents adjustable rate, mortgage-backed securities which are
repriceable within one year.
28
Capital Resources
Shareholders' equity at December 31, 2003 was $56.4 million, as compared to
$50.9 million at December 31, 2002. In 2003, the Board of Directors declared
dividends totaling $0.24 per share, compared to $0.20 per share in 2002 and
2001. At December 31, 2003, the Company's common stock had a book value of $9.01
per share compared to $8.31 per share at the end of 2002.
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, 2003, the Bank meets all
capital adequacy requirements to which it is subject.
At December 31, 2003, the Company's Tier 1 capital, total risk-based
capital and Tier 1 leverage ratios were 7.8%, 8.9% and 6.4%, respectively.
Selected capital ratios at year end 2003 as compared to 2002 are shown in Table
11.
Table 11: Capital Ratios
Adequately
December 31, Well Capitalized Capitalized
2003 2002 Requirements Minimums
---------- ---------- ------------ --------
Risk Based Capital Ratios:
Tier 1 Capital Ratio 7.8% 7.4% 6.0% 4.0%
Total Capital to
Risk-Weighted Assets 8.9% 8.5% 10.0% 8.0%
Tier 1 Leverage Ratio 6.4% 6.3% 5.0% 4.0%
29
Quarterly Financial Information
Table 12 sets forth, for the periods indicated, certain consolidated 2003
and 2002 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
2003 2002
-------------------------------------------- --------------------------------------------
(dollars in thousands,
except per share data) 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
- ------------------------------------- -- -- -- -- -- -- -- --
Summary of Operations:
Net interest income $ 7,548 $ 7,128 $ 6,762 $ 6,560 $ 6,727 $ 6,768 $ 6,400 $ 5,857
Provision for loan loss (450) (325) (650) (675) (750) (600) (525) (500)
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan loss 7,098 6,803 6,112 5,885 5,977 6,168 5,875 5,357
Other income (excluding securities
transactions) 1,282 1,435 1,487 1,609 1,657 1,552 1,496 1,404
Securities gains, net - 11 382 13 191 - 4 -
Other expenses (5,393) (5,480) (5,365) (5,469) (5,338) (5,355) (5,304) (5,159)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income tax expense 2,987 2,769 2,616 2,038 2,487 2,365 2,071 1,602
Income tax expense (1,116) (1,032) (947) (737) (908) (888) (738) (607)
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,871 $ 1,737 $ 1,669 $ 1,301 $ 1,579 $ 1,477 $ 1,333 $ 995
======== ======== ======== ======== ======== ======== ======== ========
Per Common Share:
Basic earnings $ 0.30 $ 0.28 $ 0.27 $ 0.21 $ 0.26 $ 0.24 $ 0.22 $ 0.16
Diluted earnings 0.29 0.27 0.26 0.21 0.25 0.24 0.21 0.16
Dividends declared 0.06 0.06 0.06 0.06 0.05 0.05 0.05 0.05
Book value 9.01 8.72 8.61 8.40 8.31 8.12 7.93 7.75
Market price
High 24.40 18.33 18.25 18.25 16.34 12.24 12.25 10.12
Low 18.00 15.00 14.70 15.00 11.60 10.70 9.66 9.35
Close 23.00 18.00 15.65 18.00 15.89 11.84 11.35 9.80
Balance Sheet Data (end of quarter):
Assets $819,935 $810,299 $792,338 $774,205 $730,674 $686,860 $660,943 $624,340
Loans, net 674,421 647,592 623,214 599,414 599,211 567,722 549,242 514,530
Deposits 723,686 727,803 711,988 694,816 648,636 613,030 587,533 549,648
Shareholders' Equity 56,387 54,219 53,569 51,576 50,921 49,587 48,352 47,262
30
Table 13: Quarterly Average Balances,
Yields and Rates
(dollars in thousands)
Fourth Quarter 2003 Third Quarter 2003 Second Quarter 2003
--------------------------- ------------------------------- -----------------------------
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 $ 2,254 $ 5 0.88% $ 7,745 $ 18 0.92% $ 11,191 $ 31 1.11 %
Investment Securities
Available for Sale 59,785 558 3.70 63,960 509 3.16 58,740 515 3.52
Investment Securities
Held to Maturity 29,617 370 4.96 15,878 202 5.05 - - -
Loans (1) 669,474 10,253 6.08 635,170 10,101 6.31 619,581 10,075 6.52
Interest Bearing Deposits 4,965 13 1.04 23,443 59 1.00 32,588 123 1.51
-------- ------- ---- --------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS 766,095 11,199 5.80 746,196 10,889 5.79 722,100 10,744 5.97
All Other Assets 50,766 50,356 56,128
-------- --------- --------
TOTAL ASSETS $816,861 $ 796,552 $778,228
======== ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $264,735 922 1.38 $ 247,017 849 1.36 $231,501 899 1.56
Savings 25,282 22 0.35 24,926 22 0.35 24,005 29 0.48
Time Deposits 340,734 2,497 2.91 346,420 2,693 3.08 347,706 2,856 3.29
Federal Funds Purchased and
Repurchase Agreements 15,962 35 0.87 12,428 23 0.73 12,331 29 0.94
Short Term Borrowings 1,500 10 2.64 1,342 9 2.66 1,000 7 2.81
Other Borrowings (2) 10,000 165 6.55 10,000 165 6.55 10,000 163 6.54
-------- ------- ---- --------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES 658,213 3,651 2.20 642,133 3,761 2.32 626,543 3,983 2.55
Demand Deposits 97,982 94,566 92,525
Other Liabilities 5,015 5,991 5,979
Shareholders' Equity 55,651 53,862 53,181
-------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $816,861 $ 796,552 $778,228
======== ========= ========
---- ---- ----
INTEREST SPREAD (3) 3.60% 3.47% 3.42%
==== ==== ====
------- ------- -------
NET INTEREST INCOME $ 7,548 $ 7,128 $ 6,761
======= ======= =======
NET INTEREST MARGIN (4) 3.91% 3.79% 3.76%
==== ==== ====
- --------------
(1) Interest income on average loans includes net loan fee recognition of
$116,000, $114,000 and $128,000 in the fourth, third and second quarter of
2003 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.
31
Table 13: Quarterly Average Balances, Yields and Rates
(dollars in thousands)
First Quarter 2003 Fourth Quarter 2002
---------------------------------- ----------------------------------
Interest Interest
Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate
-------- ------- ------- ------- --------- -------
ASSETS:
Federal Funds Sold $ 13,024 $ 38 1.18% $ 5,768 $ 19 1.31%
Investment Securities Available for Sale 47,805 461 3.91 48,389 492 4.03
Investment Securities Held to Maturity - - - 344 4 4.61
Loans (1) 604,042 10,075 6.76 591,981 10,256 6.87
Interest Bearing Deposits 37,820 123 1.32 11,088 45 1.61
-------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS 702,691 10,697 6.17 657,570 10,816 6.53
All Other Assets 56,445 57,547
-------- --------
TOTAL ASSETS $759,136 $715,117
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $222,862 943 1.72 $207,773 927 1.77
Savings 23,244 29 0.51 22,241 33 0.59
Time Deposits 346,895 2,970 3.47 322,461 2,930 3.60
Federal Funds Purchased and
Repurchase Agreements 11,638 27 0.94 10,831 33 1.21
Short Term Borrowings 1,000 7 2.84 139 1 2.85
Other Borrowings (2) 10,000 161 6.53 10,000 165 6.55
-------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES 615,639 4,137 2.73 573,445 4,089 2.83
Demand Deposits 85,721 85,651
Other Liabilities 6,126 5,587
Shareholders' Equity 51,650 50,434
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $759,136 $715,117
======== ========
---- ----
INTEREST SPREAD (3) 3.44% 3.70%
==== ====
------- --------
NET INTEREST INCOME $ 6,560 $ 6,727
======= ========
NET INTEREST MARGIN (4) 3.79% 4.06%
==== ====
- -------------
(1) Interest income on average loans includes net loan fee recognition of
$154,000 and $114,000 in the first quarter of 2003 and the fourth 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
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In 1997, the SEC 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. 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 is generally maintained
through a monitoring of balance sheet maturity and repricing mix. As noted
below, at December 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 sections
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, 2003 and 2002 was approximately ($508,000) and ($691,000), 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 in Item 8 of this Form
10-K.
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, 2003 or 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, 2003 and 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 policies are the
establishment and maintenance of an allowance for loan loss and the accounting
for core deposit intangible assets.
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.
33
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, 2003, the performance of acquired accounts did not differ
materially from expectations. At December 31, 2003, the unamortized balance of
the core deposit intangible was $4.7 million.
34
CNB Florida Bancshares, Inc.
and Subsidiary
Consolidated Financial Statements
35
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, 2003 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, 2003, 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/ Roy D. Jones
- ---------------------------
Senior Vice President and
Chief Financial Officer
36
Report of Independent Certified Public Accountants
To the Board of Directors and
Shareholders of CNB Florida Bancshares, Inc.:
In our opinion, the accompanying consolidated statements 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 at December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 2003 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 audits. We
conducted our audits 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 audits provide a reasonable basis for our opinion. The
consolidated financial statements of the Company for the year 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 28, 2004
37
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
38
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2003 2002
-------- --------
(dollars in thousands)
ASSETS
Cash and due from banks $ 17,158 $ 15,986
Federal funds sold - 5,400
Interest-bearing deposits in other banks 909 12,215
-------- --------
Total cash and cash equivalents 18,067 33,601
Investment securities available for sale 58,831 49,682
Investment securities held to maturity (market value of $29,416 and $0) 29,536 -
Loans, net of allowance for loan loss of $7,329 and $6,574 674,421 599,211
Loans held for sale 1,063 10,893
Premises and equipment, net 25,150 25,086
Intangible assets, net 5,345 6,056
Other assets 7,522 6,145
-------- --------
Total assets $819,935 $730,674
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand $ 94,995 $ 80,065
Savings, NOW and money market 294,540 236,284
Time under $100,000 173,452 172,671
Time $100,000 and over 160,699 159,616
-------- --------
Total deposits 723,686 648,636
Securities sold under repurchase agreements and federal funds purchased 22,550 14,446
Other borrowings 11,500 11,000
Other liabilities 5,812 5,671
-------- --------
Total liabilities 763,548 679,753
-------- --------
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,
6,256,662 and 6,125,500 shares issued and outstanding at
December 31, 2003 and 2002, respectively 63 61
Additional paid-in capital 32,288 30,840
Retained earnings 24,688 19,912
Accumulated other comprehensive (loss) income, net of taxes (652) 108
-------- --------
Total shareholders' equity 56,387 50,921
-------- --------
Total liabilities and shareholders' equity $819,935 $730,674
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
39
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
------- ------- -------
(dollars and shares in thousands)
INTEREST INCOME
Interest and fees on loans $40,504 $39,275 $38,055
Interest on investment securities available for sale 2,044 1,891 1,864
Interest on investment securities held to maturity 572 99 384
Interest on federal funds sold 92 73 102
Interest on interest-bearing deposits 318 60 12
------- ------- -------
Total interest income 43,530 41,398 40,417
------- ------- -------
INTEREST EXPENSE
Interest on deposits 14,731 14,800 17,751
Interest on repurchase agreements and federal funds purchased 114 191 552
Interest on other borrowings 687 655 1,326
------- ------- -------
Total interest expense 15,532 15,646 19,629
------- ------- -------
NET INTEREST INCOME 27,998 25,752 20,788
PROVISION FOR LOAN LOSS 2,100 2,375 2,050
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 25,898 23,377 18,738
------- ------- -------
NON-INTEREST INCOME
Service charges 3,594 3,273 2,974
Secondary market mortgage sales 1,348 2,123 1,917
Other fees and charges 871 713 613
Gain on sale of securities available for sale 406 195 129
------- ------- -------
Total non-interest income 6,219 6,304 5,633
------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 11,079 11,095 10,252
Occupancy and equipment expenses 3,603 3,427 3,113
Other operating expenses 7,025 6,634 6,471
------- ------- -------
Total non-interest expense 21,707 21,156 19,836
------- ------- -------
INCOME BEFORE INCOME TAXES 10,410 8,525 4,535
INCOME TAXES 3,833 3,141 1,594
------- ------- -------
NET INCOME $ 6,577 $ 5,384 $ 2,941
======= ======= =======
EARNINGS PER COMMON SHARE
Basic earnings per common share $ 1.06 $ 0.88 $ 0.48
======= ======= =======
Basic weighted average common shares outstanding 6,199 6,104 6,095
======= ======= =======
Diluted earnings per common share $ 1.03 $ 0.87 $ 0.48
======= ======= =======
Diluted weighted average common shares outstanding 6,399 6,216 6,188
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
40
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Accumulated
Other Total
(dollars and shares in thousands) Common Stock Additional Comprehensive Shareholders'
--------------- Paid-In Retained Income (Loss), Equity
Shares Value Capital Earnings Net of Taxes
------ ----- ---------- -------- ------------ ---------
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 declared ($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 declared ($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
Comprehensive income:
Net income 6,577
Change in unrealized loss on investment
securities available for sale, net of ($519) taxes (874)
Change in fair value of cash flow hedges, net
of $68 taxes 114
Total comprehensive income 5,817
Cash dividends declared ($0.24 per share) (1,801) (1,801)
Tax benefit from exercise of stock options 247 247
Exercise of stock options 131 2 1,201 1,203
----- ----- ------- -------- ----- ---------
BALANCE, December 31, 2003 6,257 $ 63 $32,288 $ 24,688 $(652) $ 56,387
===== ===== ======= ======== ===== =========
The accompanying notes are an integral part of these consolidated financial
statements.
41
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
--------- --------- ---------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,577 $ 5,384 $ 2,941
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of securities available for sale (406) (195) (129)
Depreciation and amortization 2,575 2,507 2,046
Provision for loan loss 2,100 2,375 2,050
Investment securities amortization (accretion), net 567 267 (6)
Non-cash compensation - - 20
Net proceeds from (origination of) loans held for sale 9,830 (985) 8,947
Loss on sale of bank property 63 - -
Gain on sale of credit card portfolio (55) - -
Deferred income tax benefit (186) (361) (715)
Changes in operating assets and liabilities:
Other assets (559) (1,229) 928
Other liabilities 13 1,357 194
--------- --------- ---------
Net cash provided by operating activities 20,519 9,120 16,276
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (78,285) (95,145) (137,959)
Purchases of investment securities available for sale (59,177) (47,069) (42,840)
Purchases of investment securities held to maturity (29,850) - -
Proceeds from sales of investment securities available for sale 10,382 15,191 1,726
Proceeds from called investment securities available for sale 14,000 8,140 14,100
Proceeds from called investment securities held to maturity - 4,060 3,395
Proceeds from maturities of investment securities available for sale 12,500 3,959 26,690
Proceeds from principal repayments on investment securities available for sale 11,602 3,380 1,256
Proceeds from principal repayments on investment securities held to maturity 303 - 3
Purchases of premises and equipment (2,235) (680) (3,356)
Proceeds from sale of premises and equipment 245 - -
Proceeds from sale of credit card portfolio 1,031 - -
Branches acquired from Republic Bank - - 41,921
--------- --------- ---------
Net cash used in investing activities (119,484) (108,164) (95,064)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 75,050 115,745 102,848
Net increase (decrease) in securities sold under repurchase agreements
and federal funds purchased 8,104 (3,702) (2,994)
Net decrease in FHLB advances - - (30,000)
Proceeds from other borrowings 500 1,000 10,000
Cash dividends (1,426) (1,221) (1,219)
Repurchase of common stock - (100) (234)
Proceeds from exercise of stock options 1,203 246 166
--------- --------- ---------
Net cash provided by financing activities 83,431 111,968 78,567
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,534) 12,924 (221)
CASH AND CASH EQUIVALENTS, beginning of year 33,601 20,677 20,898
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 18,067 $ 33,601 $ 20,677
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
42
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 2002 and 2001
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 of premiums and accretion of 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
decline is transferred from other comprehensive income and immediately
43
recorded in current period earnings. There have been no
other-than-temporary impairment losses recorded during the years ended
December 31, 2003, 2002 and 2001.
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.
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.
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 2003, 2002 and
2001, net loan fees included in interest income amounted to approximately
$512,000, $494,000 and $979,000, respectively.
Allowance for Loan Loss
The allowance for loan loss is an amount that management believes is
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 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.
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, 2003 and 2002.
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 related 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.
44
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.
Intangible Assets
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, 2003 and 2002, 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. Absent the impact of goodwill amortization
in 2001, net income, basic earnings per common share and diluted earnings
per common share would have been $3,011,000, $0.49 and $0.49, for the year
ended December 31, 2001, 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 $712,000,
$746,000 and $473,000 for 2003, 2002 and 2001 respectively. Estimated
amortization expense on core deposit intangibles for the years ended
December 31, 2004 through December 31, 2008 are as follows:
2004 $638,000
2005 638,000
2006 636,000
2007 631,000
2008 631,000
The gross carrying value and accumulated amortization related to core
deposit intangibles at December 31, 2003 was $7.3 million and $2.6
million, respectively. The gross carrying value and accumulated
amortization of core deposits was $7.3 million and $1.9 million at
December 31, 2002, 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, 2003, 2002 and 2001.
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 provisions 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
45
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, 2003 and 2002. The
interest rate contract had an unrealized loss, net of taxes, at December
31, 2003 and 2002 of ($318,000) and ($433,000), respectively. Of the
unrealized loss at December 31, 2003, the Company expects to reclassify
approximately $232,000 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, 2003 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 2003, 2002 and 2001, over the vesting
life of the options, pro forma stock-based compensation expense (net of
tax) for the years ended December 31, 2003, 2002 and 2001, would have been
$203,000, $233,000 and $123,000, respectively. The following table
outlines pro forma net income and earnings per common share that have been
reported if the Company had adopted the fair value provisions of SFAS 123
(dollars in thousands, except per share data):
As Reported Pro Forma
------------------------------------ -----------------------------------
2003 2002 2001 2003 2002 2001
--------- --------- --------- ---------- -------- ---------
Net income ........................... $ 6,577 $ 5,384 $ 2,941 $ 6,374 $ 5,151 $ 2,818
Basic earnings per common share ...... $ 1.06 $ 0.88 $ 0.48 $ 1.03 $ 0.84 $ 0.46
Diluted earnings per common share .... $ 1.03 $ 0.87 $ 0.48 $ 1.00 $ 0.83 $ 0.46
The Company entered into a definitive agreement to be acquired by The
South Financial Group, Inc. on January 21, 2004. The transaction is
expected to close in July 2004 and is subject to regulatory and Company
shareholder approval. Upon approval of the transaction by Company
shareholders, all currently unvested stock options will become
exercisable. As of December 31, 2003, unrecognized pro forma compensation
expense on outstanding, unvested stock options totaled $675,000. Assuming
Company shareholders approve the transaction; unrecognized pro forma
compensation expense would be included in pro forma net income and
earnings per common share as noted above in the period shareholder
approval for the transaction is obtained. The shareholder meeting to vote
on the transaction is expected to be held in the second quarter of 2004.
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.
46
The weighted-average grant date fair values of the options granted during
2003, 2002 and 2001 were based on the following assumptions:
Risk-Free Dividend
Interest Rates Yield
-------------------------- --------------------------
2003 2002 2001 2003 2002 2001
----- ---- ---- ---- ---- ----
Performance-based incentive and other stock
option plans ........................... 2.49% 5.13% 3.75% 1.54% 1.88% 2.08%
Expected Lives Volatility
--------------------------- --------------------------
2003 2002 2001 2003 2002 2001
----- ---- ---- ---- ---- ----
Performance-based incentive and other stock
option plans ........................... 6 years 6 years 6 years 37% 38% 36%
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 123 in 2003, 2002 and 2001 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.
Earnings Per Common Share
Basic earnings per common share is calculated based on the weighted
average number of shares of common stock outstanding. Diluted earnings per
common 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, 2003, 2002 and 2001.
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 $15,630,000, $16,125,000 and
$19,029,000 during 2003, 2002 and 2001, respectively, and cash paid for
income taxes was approximately $3,737,000, $3,388,000 and $2,025,000
during 2003, 2002 and 2001, respectively.
47
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. 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 FAS 44,
Accounting for Intangible Assets of Motor Carriers and amends FAS 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The 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.
In June 2002, the FASB issued SFAS 146, Accounting for Certain Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force 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
adoption of SFAS 146 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
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.
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 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 began reporting quarterly information with respect to the impact
of stock-based compensation on reported and pro forma earnings in the
48
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 obligations 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 did not have a
significant impact on the Company's consolidated financial statements.
In October 2003, the FASB issued FASB Staff Position No. FIN 46-6,
Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities. This Staff Position defers the effective date for
applying the provisions of FIN 46 for interests held by public entities in
variable interest entities or potential variable interest entities created
before February 1, 2003 and non-registered investment companies. This
adoption of this Staff Position is not expected to have a material impact
on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003,
except as stated below and for hedging relationships designated after June
30, 2003. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, the provisions of SFAS
149 which relate to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to both
existing contracts and new contracts entered into after June 30, 2003. The
adoption of SFAS 149 did not have a material impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("SFAS
150"). This Statement establishes standards for classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires that financial instruments
within its scope be classified as a liability (or an asset in some
circumstances). SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
49
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have a material impact on the Company's
consolidated financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (revised December 2003) ("FIN
46(R)"). FIN 46(R) is an update of FIN 46 and contains different
implementation dates based on the types of entities subject to the
pronouncement and based on whether a company has adopted FIN 46. The
Company anticipates adopting FIN 46(R) as of March 31, 2004 and does not
expect that it will have a material impact on the Company's results of
operations or financial condition. The Company does not have any interests
in variable interest entities that are subject to the provisions of FIN 46
or FIN 46(R).
3. INVESTMENT SECURITIES
Amortized cost and estimated fair value of investment securities available
for sale at December 31, 2003, 2002 and 2001 are as follows (in
thousands):
2003 U.S. U.S. State, Mortgage-
Treasury Government County, and Backed
Securities Agencies Municipal Securities Other Total
---------- -------- --------- ---------- ----- -----
Amortized cost .................. $ 4,006 $ 25,506 $ 2,168 $ 24,564 $ 3,119 $ 59,363
Gross unrealized:
Gains ........................... 2 - 64 - - 66
Losses .......................... - (541) - (57) - (598)
-------- -------- -------- -------- -------- --------
Estimated fair value ............ $ 4,008 $ 24,965 $ 2,232 $ 24,507 $ 3,119 $ 58,831
======== ======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
50
Amortized cost and estimated fair value of investment securities held to
maturity at December 31, 2003 and 2001 are as follows (in thousands). There were
no investment securities held to maturity at December 31, 2002.
2003 U.S. Mortgage-
Government Backed
Agencies Securities Total
-------- ---------- -----
Amortized cost ........................................ $ 25,000 $ 4,536 $ 29,536
Gross unrealized:
Gains ................................................. - 10 10
Losses ................................................ (130) - (130)
-------- -------- --------
Estimated fair value .................................. $ 24,870 $ 4,546 $ 29,416
======== ======== ========
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
======= =======
Of the Company's investment securities in an unrealized loss position held at
December 31, 2003, none were in an unrealized loss position for a period of more
than twelve months. Interest income earned on tax-exempt securities in 2003,
2002 and 2001 was approximately $91,000, $40,000 and $48,000, respectively.
Dividends of approximately $144,000, $171,000 and $226,000 on stock of the
Federal Reserve Bank and the Federal Home Loan Bank are included in interest on
investment securities available for sale in 2003, 2002 and 2001, respectively.
The amortized cost and estimated fair value of securities at December 31, 2003,
by contractual maturity, are shown below (in thousands):
Investment Securities Investment Securities
Available for Sale Held to Maturity
------------------ ----------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- --------- --------- ---------
Due in:
One year or less ........................................ $ 4,006 $ 4,008 $ - $ -
After one through five years ............................ 5,506 5,437 - -
After five through ten years ............................ 10,608 10,670 7,500 7,496
Over ten years .......................................... 11,560 11,090 17,500 17,374
Mortgage-backed securities and others ................... 27,683 27,626 4,536 4,546
------- ------- ------- -------
$59,363 $58,831 $29,536 $29,416
======= ======= ======= =======
51
At December 31, 2003, securities with an amortized cost of approximately
$55,011,000 and an estimated fair value of approximately $54,290,000 were
pledged to collateralize public funds, treasury tax and loan deposits, and
repurchase agreements.
Gross realized gains on sales of investment securities available for sale were
$406,000, $195,000 and $129,000 for each of the years ended December 31, 2003,
2002 and 2001, respectively. There were no gross realized 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, 2003 and 2002 were comprised of the following (in
thousands):
2003 2002
--------- ---------
Commercial ....................................................................... $ 120,033 $ 111,033
Commercial real estate ........................................................... 365,911 324,525
Mortgages (including home equity) ................................................ 157,325 132,513
Consumer ......................................................................... 32,510 32,199
Credit card ...................................................................... - 1,164
Tax free ......................................................................... 5,971 4,351
--------- ---------
Total loans, net of unearned interest and fees ................................ 681,750 605,785
Less allowance for loan loss ..................................................... (7,329) (6,574)
--------- ---------
Net loans ..................................................................... $ 674,421 $ 599,211
========= =========
Activity in the allowance for loan loss was as follows for the years ended
December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
------- ------- -------
Balance at beginning of year .................................. $ 6,574 $ 5,205 $ 3,670
Provision .................................................. 2,100 2,375 2,050
Charge-offs ................................................ (1,449) (1,232) (875)
Recoveries ................................................. 104 226 250
Republic acquisition ....................................... - - 110
------- ------- -------
Balance at end of year ..................................... $ 7,329 $ 6,574 $ 5,205
======= ======= =======
Non accrual loans totaled approximately $3,292,000 and $5,611,000 at December
31, 2003 and 2002, 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 $360,000, $402,000 and $96,000, in 2003, 2002 and 2001,
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
$387,000 and $2,439,000 at December 31, 2003 and 2002, respectively. Other real
estate owned and repossessed assets was approximately $133,000 and $24,000 at
December 31, 2003 and 2002, respectively, and is included in other assets in the
accompanying consolidated statements of financial condition.
The Company recognizes income on impaired loans primarily on the cash basis.
Impaired loans are considered to be loans with a probability that the Bank will
be unable to collect all amounts due according to the contractual terms of the
52
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, 2003, 2002 and 2001 is as follows (in thousands):
2003 2002 2001
------ ------ ------
Impaired loans with an allowance ................................................ $3,237 $6,351 $1,361
====== ====== ======
Allowance for loan loss on impaired loans ....................................... $ 647 $ 903 $ 204
====== ====== ======
Interest income recognized on impaired loans during the year .................... $ 195 $ 348 $ 66
====== ====== ======
The average balance of impaired loans during 2003, 2002 and 2001 approximated
$5.8 million, $3.2 million and $1.0 million, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following components at
December 31 (in thousands):
2003 2002
-------- --------
Buildings and improvements ....................................................... $ 21,182 $ 20,130
Equipment and furnishings ........................................................ 9,905 8,942
Land ............................................................................. 5,119 5,208
Construction in progress ......................................................... - 94
-------- --------
36,206 34,374
Less accumulated depreciation and amortization ................................... (11,056) (9,288)
-------- --------
$ 25,150 $ 25,086
======== ========
Depreciation expense was approximately $1,863,000, $1,761,000 and $1,503,000 for
2003, 2002 and 2001, respectively.
6. DEPOSITS
At December 31, 2003, the scheduled maturities of certificates of deposit
are as follows (in thousands):
2004......................... $235,921
2005......................... 57,557
2006......................... 25,985
2007......................... 13,473
2008......................... 1,215
Thereafter......................... -
--------
$334,151
========
Interest expense on deposits was as follows for the years ended December 31 (in
thousands):
2003 2002 2001
------- ------- -------
NOW ................... $ 1,310 $ 1,543 $ 1,664
Money market .......... 2,303 1,889 2,235
Savings ............... 102 155 196
Certificates of deposit 11,016 11,213 13,656
------- ------- -------
$14,731 $14,800 $17,751
======= ======= =======
53
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, 2003, 2002 and 2001:
2003 2002 2001
----------- ----------- -----------
Average daily balance ................................... $13,024,000 $11,557,000 $12,284,000
Highest amount outstanding at
any month end ........................................ 22,550,000 19,190,000 19,136,000
Interest expense ........................................ 113,000 158,000 443,000
Average rate paid ....................................... 0.87% 1.37% 3.61%
Average rate paid at year-end ........................... 0.69% 0.97% 1.53%
8. OTHER BORROWINGS
During 2001 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 on the
advances was 5.06%. Interest expense paid in 2001 on FHLB advances was
approximately $1,061,000. The highest amount outstanding during 2001 was
$40,000,000. There were no balances outstanding at December 31, 2001. The
Bank did not utilize funding from the FHLB during 2003 and 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, 2004). 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 2.85% at
December 31, 2003. Semi-annual principal payments of $714,286 begin in
April 2004, with the remainder due at maturity.
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
54
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, 2003, the Company was in
compliance with all covenants.
At December 31, 2003 there was $10,000,000 outstanding under Facility B
and $1,500,000 outstanding under Facility A, with an interest rate of
2.63%. At December 31, 2002, there was $10,000,000 outstanding under
Facility B and $1,000,000 outstanding on Facility A, with an interest rate
of 2.85%.
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 including the impact of
the interest rate swap, was $654,000 during 2003 and 2002. The notional
amount of the interest rate swap amortizes in the same manner as Facility
B.
55
9. OTHER OPERATING EXPENSES
Components of other operating expenses are as follows for the years ended
December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
------ ------ ------
Data processing ............................... $1,514 $1,328 $1,104
Communications ................................ 747 764 595
Legal and professional ........................ 763 689 618
Postage and delivery .......................... 739 700 671
Amortization of intangible assets ............. 712 746 543
Advertising and promotion ..................... 553 532 687
Supplies ...................................... 387 410 578
Regulatory fees ............................... 274 239 255
Loan expense .................................. 260 242 248
Administrative ................................ 164 163 211
Directors fees ................................ 105 88 70
Education expense ............................. 100 131 101
Insurance and bonding ......................... 98 76 105
Dues and subscriptions ........................ 83 97 100
Other general operating ....................... 78 79 67
Other ......................................... 448 350 518
------ ------ ------
$7,025 $6,634 $6,471
====== ====== ======
10. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 2003,
2002 and 2001 consisted of the following components (in thousands):
2003 2002 2001
------- ------- -------
Current:
Federal .................. $ 3,418 $ 2,978 $ 1,958
State .................... 601 524 351
------- ------- -------
Total .................. $ 4,019 $ 3,502 $ 2,309
======= ======= =======
Deferred:
Federal .................. $ (159) $ (308) $ (611)
State .................... (27) (53) (104)
------- ------- -------
Total .................. $ (186) $ (361) $ (715)
======= ======= =======
Total:
Federal .................. $ 3,259 $ 2,670 $ 1,347
State .................... 574 471 247
------- ------- -------
Total .................. $ 3,833 $ 3,141 $ 1,594
======= ======= =======
56
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, 2003 and 2002 are as follows:
2003 2002
------- -------
Gross deferred tax assets:
Loan loss provisions .................................................................. $ 2,667 $ 2,330
Unrealized loss on interest rate swap ................................................. 189 260
Unrealized loss on investment securities available for sale ........................... 198 -
Intangible assets ..................................................................... 346 266
Other items ........................................................................... 138 36
------- -------
3,538 2,892
Gross deferred tax liabilities:
Property and equipment ................................................................ (1,284) (991)
Unrealized gain on investment securities available for sale ........................... - (324)
------- -------
(1,284) (1,315)
------- -------
Net deferred tax asset ................................................................... $ 2,254 $ 1,577
======= =======
A reconciliation of the statutory federal income tax rate and the effective tax
rate is summarized as follows for the years ended December 31, 2003, 2002 and
2001:
2003 2002 2001
---- ---- ----
Statutory rates ............................ 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income ............. (1.1) (1.1) (2.1)
State income taxes, net ................. 3.6 3.6 3.6
Nondeductible expenses and other ........ 0.3 0.3 (0.3)
---- ---- ----
36.8% 36.8% 35.2%
==== ==== ====
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 as follows at December 31, 2003:
2004........................... $ 317,000
2005........................... 290,000
2006........................... 249,000
2007........................... 206,000
2008........................... 178,000
Thereafter........................... 514,000
----------
$1,754,000
==========
57
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. Comprehensive income for the years ended
December 31, 2003, 2002 and 2001 is calculated as follows (in thousands):
2003 2002 2001
------- ------- -------
Unrealized (loss) gain recognized in other comprehensive
income (net):
Available for sale securities .............................................. $(1,394) $ 352 $ 563
Interest rate swap designated as cash flow hedge ........................... 183 (700) 9
------- ------- -------
Total unrealized (loss) gain before income taxes ........................... (1,211) (348) 572
Deferred income taxes ...................................................... 451 130 (213)
------- ------- -------
Net of deferred income tax .............................................. $ (760) $ (218) $ 359
======= ======= =======
Amounts reported in net income:
Gain on sale of securities ................................................. $ 406 $ 195 $ 129
Interest rate swap designated as cash flow hedge ........................... (356) (290) (54)
Net amortization (accretion) ............................................... 567 267 (6)
------- ------- -------
Reclassification adjustment ................................................ 617 172 69
Deferred income taxes ...................................................... (230) (64) (26)
------- ------- -------
Reclassification adjustment, net of deferred income tax ................. $ 387 $ 108 $ 43
======= ======= =======
Amounts reported in other comprehensive income:
Net unrealized (loss) gain arising during period, net of tax ............... $ (373) $ (110) $ 402
Reclassification adjustment, net of tax .................................... (387) (108) (43)
------- ------- -------
Unrealized (loss) gain recognized in other comprehensive
income (net) ............................................................ (760) (218) 359
Net income ................................................................. 6,577 5,384 2,941
------- ------- -------
Total comprehensive income .............................................. $ 5,817 $ 5,166 $ 3,300
======= ======= =======
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):
2003 2002
------- -------
Balance, January 1 ............................. $ 7,591 $ 8,223
New loans and advances ...................... 2,079 2,742
Repayments (excluding renewals) ............. (1,198) (3,374)
------- -------
Balance, December 31 ........................... $ 8,472 $ 7,591
======= =======
The loans set forth above were made in the normal course of business at
prevailing interest rates and terms.
58
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, 2003, the Bank had
approximately $15,164,000 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
During 2003, 2002 and 2001 the Company declared cash dividends of $0.24,
$0.20 and $0.20 per share, respectively. At December 31, 2003 the Company
had declared and unpaid dividends of $375,000.
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
increase 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, 6,922
were exercised in 2002 and 11,662 were exercised in 2003. There are 90,025
shares remaining to be issued under the Plan as of December 31, 2003.
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, 2003, 2002 and 2001
are presented below:
2003 2002 2001
------------------------ ------------------------ -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Grant Price Shares Grant Price Shares Grant Price
-------- ----------- ------- ----------- ------- -----------
Employee stock option plans:
Outstanding at beginning of year .......... 684,712 $ 8.29 637,634 $ 8.34 621,760 $ 7.58
Options granted ........................ 91,500 15.65 112,000 10.90 72,500 9.60
Options exercised ...................... 131,162 9.16 29,547 8.33 30,876 5.39
Options forfeited ...................... 12,500 11.37 35,375 9.96 25,750 8.86
------- --------- ------- --------- ------- --------
Outstanding at end of year ................ 632,550 $ 9.53 684,712 $ 8.68 637,634 $ 8.34
======= ========= ======= ========= ======= ========
Options exercisable at year-end ........... 470,050 $ 8.38 522,503 $ 8.29 493,087 $ 7.97
======= ========= ======= ========= ======= ========
Weighted-average fair value of options
granted during the year ..................... $ 4.50 $ 4.12 $ 3.17
========= ========= ========
59
The following table summarizes information about stock options outstanding at
December 31, 2003.
Outstanding Exercisable
------------------------------- ----------------------
Average Average Average
Exercise Life Exercise Exercise
Price Range Shares (Years) Price Shares Price
----------- ------ ------- ----- ------ -----
$ 4.00-$ 4.68 51,818 2.63 $ 4.18 51,818 $ 4.18
$ 5.00-$ 8.00 220,232 5.21 7.66 209,232 7.65
$ 9.00-$ 10.25 234,000 6.69 9.72 192,250 9.71
$ 11.90-$ 17.62 126,500 8.98 14.66 16,750 15.24
------- ---- ----- ------ -----
Total 632,550 6.30 $ 9.53 470,050 $ 8.38
======= ==== ======= ======= =======
Restricted Stock
The Company awarded 12,500 shares and 5,000 shares of restricted stock
under the Performance-Based Incentive Plan in December 1999 and April
2000, respectively. The weighted average price of restricted stock vested
during 2001 was $9.00. 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 years
ended December 31, 2003 and 2002.
17. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share for the years ended December 31, 2003, 2002 and
2001 (dollars in thousands, except per share data):
2003 2002 2001
---- ---- ----
Numerator:
Net income available to common shareholders ....................... $ 6,577 $ 5,384 $ 2,941
========== ========== ==========
Denominator:
Denominator for basic earnings per common share
Weighted-average shares ........................................ 6,199,416 6,104,050 6,094,670
Effect of dilutive securities:
Common stock options ........................................... 199,514 111,725 93,807
---------- ---------- ----------
Dilutive potential common shares .................................. 199,514 111,725 93,807
---------- ---------- ----------
Denominator for diluted earnings per common share
Adjusted weighted-average shares .................................. 6,398,930 6,215,775 6,188,477
========== ========== ==========
Basic Earnings Per Common Share ........................................ $ 1.06 $ 0.88 $ 0.48
========== ========== ==========
Diluted Earnings Per Common Share ...................................... $ 1.03 $ 0.87 $ 0.48
========== ========== ==========
60
For the year ended December 31, 2002, shares that could potentially be
issued under options and potentially dilute basic earnings per common
share in the future that were not included in the computation of dilutive
earnings per common share because to do so would have been anti-dilutive
totaled 13,278. There were no anti-dilutive shares for the years ended
December 31, 2003 and 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 $321,000,
$304,000 and $274,000 for the years ended December 31, 2003, 2002 and
2001, 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 2003, 2002 and 2001 were approximately $713,000, $708,000 and
$653,000, 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, 2003, the
Bank meets all capital adequacy requirements to which it is subject.
61
The following table summarizes the actual and required capital levels and ratios
for the Company and the Bank at December 31, 2003 and 2002.
Adequately Well
Actual Capitalized Capitalized
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2003:
Total capital (to risk-weighted assets):
Consolidated .................................. $59,023 8.9% $52,833 8.0% $66,042 10.0%
Bank .......................................... 69,798 10.6% 52,763 8.0% 65,953 10.0%
Tier I capital (to risk-weighted assets):
Consolidated .................................. 51,694 7.8% 26,417 4.0% 39,625 6.0%
Bank .......................................... 62,469 9.5% 26,381 4.0% 39,572 6.0%
Tier I capital (to average assets):
Consolidated .................................. 51,694 6.4% 32,461 4.0% 40,576 5.0%
Bank .......................................... 62,469 7.7% 32,437 4.0% 40,546 5.0%
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%
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 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 $194,000,000
62
and $147,000,000 at December 31, 2003 and 2002, 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
$8,303,000 and $8,889,000 of standby letters of credit outstanding at
December 31, 2003 and 2002, 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 Bank's reserve requirement
as of December 31, 2003 and 2002 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.
Other Equity Securities
Other equity securities include stock of the Federal Home Loan Bank, the
Federal Reserve Bank and Independent Bankers Bank. The carrying value of
these equity securities approximates fair value.
63
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 ($508,000) at December
31, 2003. Fair value is based on a dealer quote at December 31, 2003, 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, 2003.
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, 2003 and 2002 and are based upon fees charged to enter into
similar arrangements as of these dates.
64
The Company's financial instruments are presented as follows at December 31,
2003 and 2002 (in thousands):
2003 2002
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
Financial assets:
Cash and cash equivalents ............................... $ 18,067 $ 18,067 $ 33,601 $ 33,601
Other equity securities ................................. 3,119 3,119 2,997 2,997
Investment securities available for sale ................ 55,712 55,712 46,685 46,685
Investment securities held to maturity .................. 29,536 29,416 - -
Net loans ............................................... 681,750 691,553 605,785 625,551
Financial liabilities:
Non-maturity deposits ................................... 389,535 389,535 316,349 316,349
Time deposits ........................................... 334,151 336,428 332,287 334,839
Interest rate swap ...................................... 508 508 691 691
Notes payable ........................................... 11,500 11,500 11,000 11,000
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, 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 December 31, 2003 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.
65
23. CONDENSED FINANCIAL DATA (PARENT COMPANY ONLY)
Statements of Financial Condition
Assets
December 31,
2003 2002
------- -------
(dollars in thousands)
Cash and cash equivalents .................................................. $ 571 $ 415
Investment in CNB National Bank ............................................ 67,398 61,226
Other assets ............................................................... 968 972
------- -------
Total assets ............................................................ $68,937 $62,613
======= =======
Liabilities and Shareholders' Equity
LIABILITIES
Other borrowings ....................................................... $11,500 $11,000
Other liabilities ...................................................... 1,050 692
-------- --------
Total liabilities ................................................... 12,550 11,692
-------- --------
SHAREHOLDERS' EQUITY
Common stock ............................................................................ 63 61
Additional paid-in capital .............................................................. 32,288 30,840
Retained earnings ....................................................................... 24,688 19,912
Accumulated other comprehensive (loss) income, net of taxes ............................. (652) 108
-------- --------
Total shareholders' equity ........................................................... 56,387 50,921
-------- --------
Total liabilities and shareholders' equity ......................................... $ 68,937 $ 62,613
======== ========
66
Statements of Income
For the Year Ended December 31,
2003 2002 2001
------- ------- --------
(dollars in thousands)
Dividend income .............................................................. $ - $ - $ 824
Interest income .............................................................. 7 34 25
Interest expense ............................................................. (687) (655) (265)
------- ------- -------
Net interest and dividend income ............................................. (680) (621) 584
Noninterest income ........................................................... - 2 6
Noninterest expense .......................................................... (75) (101) (154)
Realized gains on available for sale securities .............................. - - 125
------- ------- -------
Income (loss) before income taxes and equity
in undistributed net income of subsidiary ................................. (755) (720) 561
Income tax benefit ........................................................... 285 269 98
------- ------- -------
Income (loss) before equity in undistributed net income of ................... (470) (451) 659
subsidiary
Equity in undistributed net income of subsidiary ............................. 7,047 5,835 2,282
------- ------- -------
Net income ................................................................... $ 6,577 $ 5,384 $ 2,941
======= ======= =======
67
Statements of Cash Flows
For the Year Ended December 31,
2003 2002 2001
-------- -------- --------
(dollars in thousands)
Cash flows from operating activities:
Net income ...................................................................... $ 6,577 $ 5,384 $ 2,941
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Undistributed earnings of subsidiary ....................................... (7,047) (5,835) (2,282)
Depreciation ............................................................... - - 87
Non-cash compensation ...................................................... - - 20
Realized gains on available for sale securities ............................ - - (125)
Changes in assets and liabilities:
Other assets ............................................................... (65) (378) (110)
Other liabilities .......................................................... 414 162 (25)
-------- -------- --------
Net cash (used in) provided by operating activities ...................... (121) (667) 506
-------- -------- --------
Cash flows from investing activities:
Cash paid related to investment in subsidiary ................................... - (1,607) (7,000)
Proceeds from sale of available for sale securities ............................. - - 173
-------- -------- --------
Net cash used in investing activities .................................... - (1,607) (6,827)
-------- -------- --------
Cash flows from financing activities:
Proceeds from other borrowings .................................................. 500 1,000 10,000
Cash dividends .................................................................. (1,426) (1,221) (1,219)
Proceeds from exercise of stock options ......................................... 1,203 246 166
Payment to repurchase common stock .............................................. - (100) (234)
-------- -------- --------
Net cash provided by (used in) financing activities ...................... 277 (75) 8,713
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................... 156 (2,349) 2,392
Cash and cash equivalents, beginning of year ....................................... 415 2,764 372
-------- -------- --------
Cash and cash equivalents, end of year ............................................. $ 571 $ 415 $ 2,764
======== ======== ========
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.
24. SUBSEQUENT EVENT
On January 21, 2004, the Company announced that it entered into a
definitive agreement to be acquired by The South Financial Group, Inc. in
an all-stock transaction. Under terms of the agreement, the Company's
shareholders will receive 0.84 shares of The South Financial Group, Inc.
common stock for each CNB Florida Bancshares, Inc. share. In addition,
outstanding options to purchase the Company's stock will be converted into
options to acquire The South Financial Group, Inc.'s common stock at the
0.84 exchange ratio. The transaction is expected to close in July 2004 and
is subject to regulatory and Company shareholder approval. The Company's
subsidiary, CNB National Bank, will merge into The South Financial Group,
Inc.'s Florida banking subsidiary, Mercantile Bank.
68
ITEM 9. 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 ended
December 31, 2001 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.
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), as of the end of the period covered by this report, the Company
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of the Company's Chief
Financial Officer and Chief Executive Officer. Based upon that evaluation, the
Company's Chief Financial Officer and Chief Executive Officer have concluded
that the Company's disclosure controls and procedures are effective in alerting
them to material information regarding the Company's financial statement and
disclosure obligation in order to allow the Company to meet its reporting
requirements under the Exchange Act in a timely manner.
Changes in Internal Control
There have been no changes in internal controls or in other factors that
could significantly affect these controls during the most recent fiscal quarter,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
69
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE
REGISTRANT
Name Age Positions Held and Principal Occupations
- ---- --- ----------------------------------------
During the Past Five Years
--------------------------
Thomas R. Andrews 58 Mr. Andrews was elected to our board of directors
in 1994 and serves on the Nominating and
Corporate Governance, Audit and Compensation
Committees of our board. Mr. Andrews also serves
on the board of directors of the Bank. He is the
owner of Belco Enterprises, a commercial real
estate company.
AudreyS.Bullard 61 Ms. Bullard was elected to our board of directors
in 1987 and serves on the Nominating and
Corporate Governance, Compensation and Executive
Committees of our board. Ms. Bullard also serves
on the board of directors of the Bank. A
practicing certified public accountant, Ms.
Bullard is an officer and part owner of Bullard
Development Co. and A&R of Lake City, Inc. as
well as several partnerships and land development
firms. Ms. Bullard has been active in numerous
civic and service organizations, including the
Chamber of Commerce, the Lake Shore Hospital, the
Advent Christian Advisory Board, the Columbia
County Public School Foundation, the Lake
City/Columbia County Beautification Board, the
North Florida Advisory Council and the Board of
Santa Fe Health Care, Inc.
Millard K. Joyner 54 Mr. Joyner was elected to the board of directors
of the Company and the Bank in February 2004. Mr.
Joyner, a graduate of the University of Florida,
founded Joyner Construction in 1975. He is a
state certified general contractor and holds a
bachelor degree in building construction. Mr.
Joyner is the Vice President and a board member
of the Gainesville Country Club. He is also a
member of the Rotary Club of Greater Gainesville
and a member of the Presidents Council at the
University of Florida. He is the past president
and a current director of the Gator Golf
Boosters. Mr. Joyner has been a past member on
the board of directors of the Gainesville Chamber
of Commerce and the Gainesville Home Builders
Association. He has served as past president of
the Gainesville Golf and Country Club as well as
a past member of the Board of Governors Heritage
Club.
70
Raymon Land, Sr. 64 Mr. Land was elected to our board of directors in
1998 and serves on the Audit Committee of our
board. Mr. Land also serves on the board of
directors of the Bank. Mr. Land is the owner of
Raymon J. Land, a watermelon and produce
brokerage and shipping business. Mr. Land is the
owner of a commercial cow and calf production
operation and raises registered quarter horses.
Mr. Land is President of Land Truck Brokers,
Inc., a transportation company for produce. He
served as President of both the National
Watermelon Association, Inc. and the Florida
Watermelon Association, Inc. and presently is on
the Executive Committee of both Associations. He
serves as Chairman of the Board to Sunstate
Produce, Inc. and Sunstate Truck Brokers, Inc.
with offices in Plant City, Florida. Mr. Land is
also a licensed real estate salesman with Land
Brokerage Realtor.
Jon W. Pritchett 42 Mr. Pritchett was elected to the Board of
Directors of the Company in 2001 and serves on
the Nominating and Corporate Governance, Audit,
Compensation and Executive Committees of the
Company's Board of Directors as well as on the
Bank's Board of Directors. Mr. Pritchett serves
as President and Chief Executive Officer of
Nextran Corporation and President of Pritchett
Trucking, Inc. He is a board member of the Mack
Truck National Dealer Council and the Florida
Trucking Association. Mr. Pritchett also served
as a board member on the Gator Boosters from 1997
through 2001. Mr. Pritchett is the son of Mr. M.
Pritchett.
Marvin H. Pritchett 70 Mr. Pritchett was elected to our board of
directors in 1988 and serves on the Executive and
Compensation Committees of our board as well as
on the Bank's board of directors. Mr. Pritchett
serves as Chief Executive Officer of Pritchett
Trucking, Inc., President of Pritchett, Inc., a
timber firm and President of G. P. Materials,
Inc., which sells aggregate material. Mr.
Pritchett is also the Chairman of Nextran
Corporation, with heavy duty truck dealerships in
Jacksonville, Orlando, Auburndale, Tampa, Lake
City, Miami, Riveria Beach, Pompano, Kennasaw and
Atlanta. Nextran Truck Centers represent the
following truck manufacturers: Mack, Volvo,
Isuzu, Mitsubishi and GMC. Mr. Pritchett is the
father of Mr. J. Pritchett.
Halcyon E. Skinner 57 Mr. Skinner was elected to our board of directors
in 2000 and serves on the Executive and
Compensation Committees of our board. Mr. Skinner
also serves on the board of directors of the
Bank. Mr. Skinner is the Managing Partner of the
Jacksonville law offices of McGuireWoods LLP and
has been a partner in that law firm for more than
five years. He also serves on the Board of
Directors and the Finance Committee of the
Jacksonville Symphony Orchestra.
71
K.C. Trowell 65 Mr. Trowell is our Chairman and Chief Executive
Officer ("CEO") and holds the same positions at
the Bank. He was elected to our board of
directors in 1987 and serves as Chairman of the
Executive Committee of our board. He has served
as the Chairman and CEO of the Company since its
inception in 1987 and of the Bank since its
inception in 1986. 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 NationsBank of Lake City (and its
predecessors), American Bank of Jacksonville, and
Barnett Banks, Inc. in Jacksonville. He is 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 57 Mr. Frankland has served as the President and
Chief Operating Officer of the Company and the
Bank since February 2004. Prior to February 2004
Mr. Frankland held the position of Executive Vice
President and Chief Financial Officer of the
Company. 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.
Roy D. Jones 35 Mr. Jones has served as Senior Vice President
and Chief Financial Officer of the Company since
February 2004. Mr. Jones served as the Senior
Vice President of Corporate Development of the
Bank from May 2001 to February 2004. From 1997
until 2001, Mr. Jones was a Senior Vice President
for Bank of America in Charlotte, North Carolina,
where he served in various capacities, including
Corporate Treasury and Accounting Policy. From
1996 through 1997, Mr. Jones served as the
Financial Reporting Manager for HomeSide Lending,
Inc. Prior to 1996, Mr. Jones was an auditor for
Price Waterhouse LLP in Jacksonville and Miami,
Florida, where he specialized in the financial
services industry. Mr. Jones has recently been
involved with fund raising efforts for the
Leukemia and Lymphoma Society of North Florida
and the North Florida Chapter of the National
Multiple Sclerosis Society.
72
Martha S. Tucker 53 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 36 years of banking
experience.
Robert E. Cameron 59 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 36 years. Mr. Cameron is
active with the Gainesville Area Chamber of
Commerce and the Gainesville Board of Realtors.
Currently he is a member of the Board of
Directors of the Gainesville Builders Association
and Child Care Resources.
John D. Kennedy 47 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 over 30 years of banking experience.
David H. Sheffield 40 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 18 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.
73
Suzanne M. Norris 40 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
18 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.
Audit Committee Financial Expert
The Board of Directors does not consider any of the Audit Committee members
to be a "financial expert" as that term is defined in SEC regulations. The
Company was in the process of seeking an audit committee member that fit this
definition, however this effort was suspended in connection with the Company's
decision to enter into a definitive agreement to be acquired by The South
Financial Group, Inc. In the event the acquisition of the Company by The South
Financial Group, Inc. unexpectedly fails to close, the Company will resume its
efforts to appoint a "financial expert" to the Audit Committee. The Company
considers its existing Audit Committee members to have sufficient ability to
evaluate and analyze the Company's financial statements and to understand
internal controls and procedures for financial reporting.
Members of the Audit Committee include Messrs. Andrews (Chairman), Land and
J. Pritchett, none of whom is an officer or employee of the Company. During 2003
the Audit Committee held 4 meetings. The Audit Committee is responsible for the
matters set forth in its written charter as adopted by the Board. Such
responsibilities include selection and oversight of the Company's independent
pubic accountants and review of audit plans, audit reports and financial
statements.
Code of Ethics
The Company has adopted a code of ethical conduct that applies to its Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Controller
and other persons having similar knowledge of, and influence over, the financial
activities of the Company. A copy of this code of ethical conduct may be
obtained, without charge, by writing to Roy D. Jones, Senior Vice President and
Chief Financial Officer, CNB Florida Bancshares, Inc., 9715 Gate Parkway North,
Jacksonville, Florida 32246.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires our executive officers and directors, and any persons
owning more than 10 percent of a class of our stock, to file certain reports on
ownership and changes in ownership with the SEC. During 2003, our executive
officers and directors filed with the SEC on a timely basis all required reports
relating to transactions involving our equity securities beneficially owned by
them, except that Mr. Andrews, Ms. Bullard, Mr. Frankland, Mr. M. Pritchett and
Mr. Skinner made one late filing and Mr. Land, Mr. J. Pritchett and Mr. Trowell
made two late filings.
74
ITEM 11. EXECUTIVE COMPENSATION
Members of the Compensation Committee of the Board of Directors include Ms.
Bullard and Messrs. Andrews and M. Pritchett. During 2003 this committee held 3
meetings. The Compensation Committee is principally responsible for (1)
establishing and recommending to the board of directors the compensation of our
CEO, COO and CFO; (2) establishing and recommending to the board of directors
the compensation plan of our other senior management; (3) periodically reviewing
all salary administration and employee benefits; and (4) developing and
recommending to our board of directors stock incentive compensation for officers
and employees.
Summary Compensation Table. The following table sets forth for the years
ended December 31, 2003, 2002 and 2001, the cash compensation paid or accrued,
as well as certain other compensation paid or accrued for those years to our CEO
and the additional most highly compensated executive officers for services
rendered to the Company and the Bank during the periods indicated.
Summary Compensation Table (1)
- --------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- --------------------------------------------------------------------------------------------------------------
Awards
- --------------------------------------------------------------------------------------------------------------
Name and Restricted Securities All other
Principal stock Underlying Compensation
Position Year Salary Bonus award(s) Options/SARs ($) (2)
($) ($) ($) (#)
- --------------------------------------------------------------------------------------------------------------
K. C. Trowell, 2003 299,250 149,625 - 21,000 7,864
Chairman and Chief 2002 285,000 142,500 - - 6,888
Executive Officer 2001 270,000 108,000 - - 6,216
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
G. Thomas Frankland, 2003 220,500 110,250 - 15,000 7,864
President and Chief 2002 210,000 105,000 - - 6,888
Operating Officer 2001 200,000 81,250 - - 6,216
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Roy D. Jones, 2003 141,625 25,000 - 3,000 6,544
Senior Vice President 2002 137,500 25,000 - 5,000 6,044
and Chief Financial 2001 110,000 10,000 - 5,000 2,942
Officer
- --------------------------------------------------------------------------------------------------------------
(1) Columns relating, respectively, to "other annual compensation" and "LTIP
payouts" have been deleted because no compensation required to be reported
in such columns was awarded to, earned by, or paid to the named executives
during the periods covered by such columns. Non-cash perquisites are not
disclosed in this table because the aggregate value does not exceed the
lesser of $50,000 or 10% of total annual salary and bonus.
(2) The amounts shown in this column for 2003 consist of payments for term life
insurance premiums (Mr. Trowell - $ 864; Mr. Frankland - $ 864; and Mr.
Jones -$544 and our matching contributions to the 401(k) plan for 2003 (Mr.
Trowell - $ 7,000; Mr. Frankland - $7,000; and Mr. Jones $6,000).
75
Option/SAR Grants in Last Fiscal Year
Stock Options. The following table sets forth the individual grants made during
the last fiscal year to the named executive officers.
- ------------------------------------------------------------------------------------------------------------------------------------
Potential realizable value at assumed
annual rates of stock price appreciation
Individual grants for option term
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of
Number of total
securities options/SARs
underlying granted to Excise of
options/SAR employees in base price Expiration 5% 10%
Name s granted (#) fiscal year ($/Sh) date ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
K. C. Trowell,
Chairman and Chief 21,000 23% $15.17 06/01/2013 $200,340 $507,780
Executive Officer
- ------------------------------------------------------------------------------------------------------------------------------------
G. Thomas Frankland,
President and Chief 15,000 16% $15.17 06/01/2013 $143,100 $362,700
Operating Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Roy D. Jones,
Senior Vice President 3,000 3% $15.17 06/01/2013 $ 28,620 $ 72,540
and Chief Financial
Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises and Fiscal Year-End Options. The following table
sets forth information concerning the exercise of stock options during the last
completed fiscal year by the named executive officers and the fiscal year-end
value of unexercised options.
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised in-
Shares Value Unexercised the-money
acquired on Realized options/SARs at options/SARs at
Name exercise (Market-Strike) fiscal year end fiscal year end (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
K.C. Trowell 6,922 $128,472 202,140 15,750 $3,214,770 $ 123,322
- ------------------------------------------------------------------------------------------------------------------------------------
G. Thomas Frankland - - 63,750 11,250 $ 909,363 $ 88,088
- ------------------------------------------------------------------------------------------------------------------------------------
Roy D. Jones - - 7,000 6,000 $ 89,123 $ 67,368
- ------------------------------------------------------------------------------------------------------------------------------------
(1) All information in this table relates to options. We have not granted any
SARs.
(2) As of December 31, 2003, the market value of our common stock was $23.00
per share.
76
Long-Term Incentive Plans--Awards In Last Fiscal Year
Long-Term Incentive Plans. There were no long-term incentive plan awards granted
to the executive officers listed in the above table in the last fiscal year.
77
EMPLOYMENT AGREEMENTS
Mr. Trowell's Employment Agreement. On December 10, 1998, we entered into
an employment agreement with K.C. Trowell (the "Trowell Agreement") which
provides that Mr. Trowell will serve as our Chairman and CEO. The Trowell
Agreement has a rolling three-year term, provided Mr. Trowell's employment term
ends on the first day of the month following his 70th birthday. The Trowell
Agreement originally provided for a minimum annual base salary of $250,000. The
annual base salary is currently $299,250. The Trowell Agreement also provides
for participation in the Incentive Plan, and participation in our various
savings, retirement and welfare benefit plans. Mr. Trowell also is eligible to
receive an annual bonus targeted at 50% of his annual base salary. We also
agreed to provide Mr. Trowell with a company car. The Trowell Agreement contains
a noncompetition provision. In the event we terminate Mr. Trowell's employment
for a reason other than for cause, death or disability, or if Mr. Trowell
terminates his employment for good reason (as defined in the Trowell Agreement),
then we must pay Mr. Trowell a lump sum equal to (i) the amount of any earned
but unpaid salary and bonus, deferred compensation and vacation pay, plus (ii)
an amount equal to 50% of the sum of Mr. Trowell's annual base salary and
highest annual bonus from the date of termination until the end of the
employment period. If we terminate Mr. Trowell's employment without cause, or if
Mr. Trowell terminates his employment for good reason within two years of a
change of control of the Company, then we will pay Mr. Trowell 100% of the
amount referred to in (ii) above. In addition, all options to acquire shares of
common stock and all restricted stock previously granted to Mr. Trowell
immediately become vested and non-forfeitable upon a change in control.
Mr. Frankland's Employment Agreement. On November 30, 1998, we entered into
an employment agreement with G. Thomas Frankland (the "Frankland Agreement")
which provides that Mr. Frankland will serve as our Executive Vice President and
Chief Financial Officer (in February 2004 Mr. Frankland was named President and
Chief Operating Officer of the Company). The Frankland Agreement originally
provided for an annual base salary of $185,000. The annual base salary is
currently $220,500. The Frankland Agreement also provides for participation in
the Incentive Plan, and participation in our various incentive, savings,
retirement and welfare benefit plans. Mr. Frankland also received a signing
bonus of $35,000 and is eligible to receive an annual bonus targeted at 50% of
his annual base salary subject to meeting goals and objectives determined by the
board. We also agreed to grant Mr. Frankland options to purchase 40,000 shares
of common stock at a price of $8.00 per share, 20,000 of which vested on the
first anniversary of the Frankland Agreement and 10,000 of which vested in each
of the next two succeeding anniversary dates. We also agreed to grant Mr.
Frankland 5,000 shares of restricted stock, 2,500 of which vested and became
nonforfeitable on the first anniversary of the Frankland Agreement and 2,500 of
which vested and became nonforfeitable on the second anniversary of the
Frankland Agreement. In all other terms, the Frankland Agreement is
substantially similar to the Trowell Agreement.
78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Name Amount and Nature of Percent of Shares of
---- Beneficial Ownership (1) Common Stock Outstanding (10)
------------------------ -----------------------------
Thomas R. Andrews .......................................... 213,500 (2) 3.16%
Banc Funds Company LLC ..................................... 378,605 5.61% (11)
Audrey S. Bullard .......................................... 235,427 (3) 3.49%
G. Thomas Frankland ........................................ 149,750 (4) 2.22%
Roy D. Jones ............................................... 8,250 (5) *
Millard K. Joyner .......................................... 200 *
Raymon Land, Sr ............................................ 125,574 (2) 1.86%
Jon W. Pritchett ........................................... 220,974 (6) 3.27%
Marvin H. Pritchett ........................................ 1,094,491 (7) 16.21% (12)
Halcyon E. Skinner ......................................... 6,000 (8) *
K.C. Trowell ............................................... 409,322 (9) 6.06% (13)
Directors and Executive Officers
as a Group (9 persons) (10) ................................ 2,463,488 36.48%
- ---------------------
(1) Pursuant to the rules of the SEC, the determinations of "beneficial
ownership" of common stock are based upon Rule 13d-3 under the Exchange
Act, which provides that shares will be deemed to be "beneficially owned"
where a person has, either solely or in conjunction with others, the power
to vote or to direct the voting of shares and/or the power to dispose, or
to direct the disposition of shares or where a person has the right to
acquire any such power within 60 days after the date such "beneficial
ownership" is determined. Shares of common stock that a beneficial owner
has the right to acquire within 60 days pursuant to the exercise of stock
options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such owner but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. All amounts are determined as of February 28, 2004.
(2) Includes currently exercisable options to purchase 4,500 shares.
(3) Includes 9,614 shares owned by Ms. Bullard's husband, 2,000 shares
transferred to a revocable trust for benefit of her daughter and currently
exercisable options to purchase 4,500 shares.
(4) Includes 63,750 shares underlying options that are exercisable within 60
days of February 28, 2004.
(5) Includes currently exercisable options to purchase 8,250 shares.
(6) Includes 25,000 shares owned by Mr. Pritchett's wife, 12,270 shares owned
by Mr. Pritchett's daughters and currently exercisable options to purchase
2,500 shares.
(7) Includes 107,126 shares owned by New River Developers, 113,702 shares owned
by Pritchett Trucking, Inc., 87,692 shares owned by Mid-Florida Hauling,
Inc., 50,938 shares owned by Bulldog Trucking, 40,148 shares owned by Mr.
Pritchett's wife and 55,000 shares owned by Pritchett, Inc. Mr. Pritchett
shares voting and investment power with respect to all such shares. Also
includes currently exercisable options to purchase 4,500 shares.
(8) Includes currently exercisable options to purchase 2,000 shares.
(9) Includes 50,000 shares owned by Mr. Trowell's former spouse with respect to
which he shares voting and investment power. Also includes 202,140 shares
underlying options that are exercisable within 60 days of February 28,
2004.
(10) Based on a total of 6,256,662 shares of common stock outstanding as of
February 28, 2004, plus shares of common stock which may be acquired by the
beneficial owner, or group of beneficial owners, within 60 days of February
28, 2004 by exercise of 495,925 options.
(11) Banc Funds Company LLC is a beneficial shareholder of over 5%. Stock
ownership is through three partnerships which own the following shares:
Banc Fund IV L.P. - 77,220 shares, Banc Fund V L.P. - 154,874 shares and
Banc Fund VI L.P. - 146,511 shares. The address of the principal business
office is 208 S. LaSalle Street, Chicago, Illinois 60604.
(12) Mr. Pritchett is a shareholder with beneficial ownership of over 5%. His
address is Post Office Box 311, Lake Butler, Florida 32054.
(13) Mr. Trowell is a beneficial shareholder with ownership of over 5%. His
address is 9715 Gate Parkway North, Jacksonville, Florida 32246.
* Represents less than 1% of the outstanding shares of common stock.
79
EQUITY COMPENSATION PLAN INFORMATION
The following table presents the Company's Equity Compensation Plans. In
April 1998, shareholders approved the terms of the Performance-Based Incentive
Plan ("the Plan") allowing a maximum of 540,000 shares to be granted. In May
2001, shareholders approved a proposal to amend the number of shares that may be
granted under the Plan to 800,000 shares. In addition to options granted under
the Plan, there were also options outstanding under a previous, Board-only
approved long-term incentive plan. This long-term incentive plan allowed for
periodic stock option grants based on the Company's financial performance. There
are no further grants being made under this plan.
- ------------------------------------------------------------------------------------------------------------------------------------
Number of shares to be Weighted average Number of
issued upon exercise of exercise price of securities remaining
outstanding options, outstanding options, available for future
warrants and rights warrants and rights issuance
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 537,500 $ 10.29 90,025
approved by security holders
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 95,050 5.29 -
------- ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
Total 632,550 $ 9.53 90,025
======= ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, the Bank loaned funds to certain of our
executive officers and directors in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other customers, and
which did not involve more than the normal risk of collectability or present
other unfavorable features.
Mr. Skinner is a partner in the law firm of McGuireWoods LLP, which
provides legal services to the Company.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees paid to PricewaterhouseCoopers LLP for professional services rendered
for the Company are listed below for the years ended December 31, 2003 and 2002.
2003 2002
-------- --------
Audit ................................ $115,000 $115,000
Audit-Related ........................ - -
Tax .................................. 20,600 20,000
All Other ............................ - -
-------- --------
Total ............................. $135,600 $135,000
======== ========
The Audit fees for the years ended December 31, 2003 and 2002,
respectively, were for professional services rendered for the audits of the
consolidated financial statements of the Company. The "Tax" fees for the years
ended December 31, 2003 and 2002, respectively, were for services related to tax
compliance, primarily including the preparation of tax returns.
Audit Committee Administration of the Engagement
The Company's Audit Committee is directly responsible for the appointment,
compensation, retention and oversight of auditors who provide audit services to
the Company. Proposals for such services are presented to the Audit Committee
for approval. Such proposals are provided directly to the Chairman of the Audit
Committee by the firm proposing the services. Proposals are discussed by the
Audit Committee, at which point a decision to accept or reject the proposal is
made.
80
PART IV
ITEM 15. 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).
16 Letter from Arthur Andersen LLP regarding Change in Registrant's
Certifying Accountants (Incorporated by reference to Exhibit 16.1
to the Company's Current Report on Form 8-K filed on May 24,
2002).
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP, independent certified
public accountants.
31(a) Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31(b) Chief Financial Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32(a) Chief Executive Officer certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32(b) Chief Financial Officer certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Report on Form 8-K:
- -------------------
On October 23, 2003, the Company filed a Form 8-K to report its 2003 third
quarter earnings.
81
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/ Roy D. Jones
----------------
Roy D. Jones
Senior Vice President
and Chief Financial Officer
Date: March 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Thomas R. Andrews Director March 10, 2004
Thomas R. Andrews
/s/ Audrey S. Bullard Director March 10, 2004
Audrey S. Bullard
/s/ Millard K. Joyner Director March 10, 2004
Millard K. Joyner
/s/ Raymon J. Land Director March 10, 2004
Raymon J. Land
/s/ Jon W. Pritchett Director March 10, 2004
Jon W. Pritchett
/s/ Marvin H. Pritchett Director March 10, 2004
Marvin H. Pritchett
/s/ Halcyon E. Skinner Director March 10, 2004
Halcyon E. Skinner
/s/ K. C. Trowell Chairman, CEO & Director March 10, 2004
K. C. Trowell
/s/ G. Thomas Frankland President and COO March 10, 2004
G. Thomas Frankland
/s/ Roy D. Jones Senior Vice President March 10, 2004
Roy D. Jones and Chief Financial Officer
(Principal Financial Officer)
/s/ Martha S. Tucker Controller March 10, 2004
Martha S. Tucker (Principal Accounting Officer)
82