UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 31, 2002
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No: 0-25988
CNB Florida Bancshares, Inc.
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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 ___ No X
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $43,675,685.30 (based on the closing price of the Registrant's
common stock as quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") on June 28, 2002 of $11.35 per share).
The number of shares of the Registrant's common stock outstanding as of March 7,
2003 was 6,125,500 shares, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's 2003 Annual Meeting Proxy Statement is incorporated by
reference in this report in Part III, pursuant to Instruction G of Form 10-K,
except for the information relating to executive officers and key employees. The
Company will file its definitive Proxy Statement with the Commission prior to
April 30, 2003.
CNB FLORIDA BANCSHARES, INC.
FINANCIAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business .....................................................................................3
Supervision and Regulation ...................................................................8
Item 2. Properties ..................................................................................11
Item 3. Legal Proceedings ...........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders .........................................12
Executive Officers and Key Employees of the Registrant ......................................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..........................14
Item 6. Selected Financial Data ........................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..........16
Overview .......................................................................................16
Results of Operations ..........................................................................17
Income Taxes ...................................................................................21
Liquidity and Interest Rate Sensitivity.........................................................21
Earning Assets..................................................................................25
Loan Quality ...................................................................................26
Investment Portfolio ...........................................................................28
Capital Resources ..............................................................................30
Quarterly Financial Information ................................................................31
Item 7a. Qualitative and Quantitative Disclosure About Market Risk ......................................34
Critical Accounting Policies ...................................................................34
Item 8. Consolidated Financial Statements ..............................................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........71
PART III
Item 10. Directors and Executive Officers of the Registrant ...........................................71
Item 11. Executive Compensation .......................................................................71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ......................................................................................71
Item 13. Certain Relationships and Related Transactions ...............................................71
Item 14. Controls and Procedures ......................................................................72
PART IV
Item 15. Exhibits and Reports on Form 8-K .............................................................72
SIGNATURES AND CERTIFICATIONS
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PART I
BUSINESS
This Annual Report on Form 10-K contains forward-looking statements, which
involve risks and uncertainties which are described in this Annual Report and in
other filings with the Securities and Exchange Commission (the "SEC"). The
Company makes this Form 10-K available on its web site at www.cnbnb.com. The
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actual results of CNB Florida Bancshares, Inc. (the "Company" or "CNB") may
differ significantly from the results discussed in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, increased competitive pressures among depository and other financial
institutions, changes in the interest rate environment that may reduce margins,
general economic or business conditions in the Company's markets that lead to a
deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with Selected
Historical Financial Information and the Consolidated Financial Statements of
the Company, which are included in this Form 10-K.
GENERAL
The Company is a one-bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), which commenced operations in
1987 by acquiring the capital stock of CNB National Bank (the "Bank"), which was
formed in 1986. The Company relocated its headquarters from Lake City, Florida
to Jacksonville, Florida during 2000 in connection with its expansion plans
described below. The Bank is a national banking association subject to the
supervision of the Office of the Comptroller of the Currency ("Comptroller"). It
provides traditional deposit, lending and mortgage products and services to its
commercial and retail customers through fourteen full service branches located
within the following contiguous counties in Northeast Florida: Alachua, Baker,
Bradford, Columbia, Duval, St. Johns, Suwannee and Union County. At December 31,
2002, the Company had total assets of $730.7 million, total gross loans of
$605.8 million, total deposits of $648.6 million, and total shareholders' equity
of $50.9 million. Net income for the years ended December 31, 2002, 2001 and
2000 was $5.4 million, $2.9 million and $2.5 million, respectively. For
additional financial information related to the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements" in Part II of this Form 10-K.
EVOLUTION OF THE FLORIDA BANKING MARKET
Significant changes in interstate banking and branching laws, enacted
during the early 1980s, have allowed bank holding companies to aggressively
expand into new markets that have attractive growth rates and demographics. As a
result, substantial consolidation of the Florida banking market has occurred.
Management believes Florida has been particularly attractive to regional bank
holding companies because it is the fourth largest state in the country in terms
of total population and is among the ten fastest growing states in the country.
As more out-of-state bank holding companies enter the Florida market, the
Company believes that the number of depository institutions headquartered and
operating in Florida will continue to decline.
The Company has observed a similar consolidation trend in the markets in
and around Gainesville and Jacksonville (the "Expansion Markets"). Historically
the Company competed successfully in Columbia, Suwannee, Baker, Bradford and
Union Counties (the "Core Markets"), against larger bank holding companies for
middle market customers. In the Company's Expansion Markets, many of such
customers have preferred the banking services and products of banks that are
locally headquartered. Increasingly, however, large regional bank holding
companies have entered the Company's Expansion Markets by acquiring such
previously locally headquartered banks. For example, in January 1998, Bank of
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America Corporation formerly known as NationsBank Corporation completed its
acquisition of Jacksonville-based Barnett Banks, Inc. ("Barnett"), which prior
to its acquisition was the largest bank headquartered in Florida. The
acquisition of Barnett closely followed the acquisition of three of
Jacksonville's community banks by SouthTrust Bank Corporation ("SouthTrust") and
Compass Bancshares, Inc. ("Compass") in 1996 and 1997. Similarly, Gainesville
State Bank, the largest community bank in Gainesville and Alachua County (the
"Gainesville Market"), was acquired by Compass in 1997. Consolidation continued
into 2002 and 2003 as both BB&T of Winston-Salem, North Carolina and Alabama
National BanCorporation of Birmingham, Alabama entered the First Coast and
Gainesville markets by acquiring Florida-based community banks. As a result, the
Company now competes in its Core Markets, and will compete in its Expansion
Markets, primarily with SunTrust Banks, Bank of America, Wachovia, SouthTrust,
AmSouth and Compass, all of which are headquartered outside of Florida.
GROWTH OPPORTUNITY FOR THE COMPANY
Management believes that a significant segment of the historical customer
base of Barnett and the customer bases of other acquired community banks in
Northeast Florida, particularly individuals and small and medium-sized
businesses, prefer the personalized service that characterized their
relationships with the locally headquartered banks that were acquired. Many of
these personal relationships have been disrupted as the larger, regional
financial institutions increasingly focus on larger corporate customers, offer
primarily standardized loan and deposit products and services, and employ
centralized management and more remote decision-making. Thus, Company management
believes there exists a unique opportunity to address the under-served banking
needs of individuals and small and medium-sized businesses in its Expansion
Markets, which are contiguous and demographically similar to the Company's
existing Core Markets. Accordingly, the Company's current strategic focus is to
capitalize on this market opportunity. In pursuing this opportunity, the Company
will continue to focus on that specific segment of the market to which it has
historically appealed. The Company believes that its historical strategy of
providing personalized and consistent service to its small and middle-market
corporate customers and individuals will allow it to continue to compete
profitably, not only in the markets that it presently serves but in other
markets as well.
BUSINESS STRATEGY
The Company's primary goal is to enhance profitability and shareholder
returns through aggressive but sound growth. The Company's long-term strategy is
to (i) continue to grow its full service banking capabilities in the Expansion
Markets, (ii) leverage existing branch capacity, (iii) expand its mortgage,
consumer and commercial lending activities, and (iv) continue to differentiate
itself from its larger competitors by emphasizing personalized,
relationship-driven service provided by a locally-headquartered financial
institution.
EXPAND IN UNDER-SERVED MARKETS
The consolidation of the banking industry in Northeast Florida has created
a window of opportunity for the Company to expand its operations in the
Expansion Markets. The Expansion Markets are contiguous and culturally similar
to the Core Markets. Like the Core Markets, the Expansion Markets consist in
large part of individuals and small and medium-sized businesses. The Company
believes that its familiarity with meeting the banking needs and expectations of
similar customers in the Core Markets makes the Company particularly qualified
to attract banking customers accustomed to banking with community banks in the
Expansion Markets. The recent consolidation also has dislocated qualified
banking professionals who have strong ties to and an understanding of their
local markets. The Company believes that it has attracted and will continue to
attract qualified banking professionals, thereby benefiting from their
experience and their ability, in many instances, to bring with them the banking
business of their loyal customers. These factors, together with the Bank's asset
size and its capital base, position the Company to work more effectively with
middle-market customers than many smaller community banks in the Expansion
Markets.
PROVIDE COMMUNITY BANKING SERVICE
The Company believes that it can achieve the goals outlined above through a
continued commitment to the "community bank philosophy," which emphasizes
offering a broad range of personalized products and services through banking
professionals who understand the banking industry and the banking needs of the
local communities they serve. Each branch manager and individual loan officer is
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given a certain degree of authority and discretion to approve loans and to price
loans and services in order to respond quickly and efficiently to the needs of
the Company's customers. In implementing this strategy, the Company will combine
the experience and customer networks of its loan officers with centralized
information technology to effectively price and provide customized banking
services to enhance overall profitability. The Company intends to pursue this
strategy throughout its Core and Expansion Markets and operate a multi-office
community bank that emphasizes decision-making at the local level.
To ensure that the Company's proposed expansion does not erode its
standards for service and quality, the Company created four operating divisions:
the Gainesville Division (Alachua County), the TriCounty Division (Baker,
Bradford and Union counties), the Suwannee Valley Division (Columbia and
Suwannee Counties) and the First Coast Division (Duval and St. Johns Counties).
This organizational structure will help to ensure that the Company's banking
products and services are tailored to the individual markets it serves, as
opposed to the "one size fits all" approach that generally is followed by larger
financial institutions. The divisions are headed by Division Presidents who
effectively have the authority to operate the division as a community bank, so
long as it is done within the parameters of the Company's policies and long-term
strategy.
DEPOSIT PRODUCTS AND SERVICES
The Company, through its banking subsidiary, offers various deposit
products and services to its retail and commercial customers. These products
include commercial and retail checking accounts, specialized low-cost checking
for customers who write few checks per month, money market accounts for
consumers and commercial customers, bundled account products including the
Generations Gold(TM) affinity program, NOW accounts and savings accounts.
Additionally, the Company offers an interest-bearing transaction account for
seniors with no minimum balance requirements, no service charge and no per-check
charge. For customer convenience and ease of storage, the Company offers
image-based monthly account statements, as well as an automated telephone
banking service for balance reporting. The Company also offers internet banking
services, which allow customers to check balances, transfer funds and pay bills
on-line. The Company's deposit services include cash management for commercial
customers for overnight investment, wire transfer services, collections, money
orders, safe deposit boxes and traveler's checks. The Bank is currently a member
of the STAR (formerly HONOR), PLUS and CIRRUS networks of automated teller
machines that may be used by Bank customers in major cities throughout the
United States. The Federal Deposit Insurance Corporation ("FDIC") insures all
deposits up to the maximum amount permitted by law (generally $100,000 per
depositor subject to aggregation rules).
LOAN PRODUCTS AND LENDING POLICY
GENERAL
The Company provides to customers a full range of short- to medium-term
commercial, agricultural, Small Business Administration ("SBA") guaranteed,
Farmers Home Administration guaranteed, long term residential mortgages and
personal loans, both secured and unsecured. Credit is extended consistent with a
comprehensive loan policy that governs advance rates, maturities and acceptable
collateral. The Company's loan policy grants lending authority using a tiered
schedule that grants authority to officers based on certain risk parameters
including the collateral type. The Executive Loan Committee of the Bank's Board
of Directors must approve loans exceeding officer authority and exhibiting
certain risk parameters. Exceptions to the policy must be recommended by the
applicable officer and approved by either a Division President or the Credit
Administrator within their authority and approved by the Executive Loan
Committee.
COMMERCIAL LOANS
Commercial loan products include short-term loans and lines of credit for
working capital purposes. These loans are generally secured by the borrower's
current assets, typically accounts receivable and inventory. Other commercial
loan products include intermediate term loans for farm and non-farm equipment,
agricultural loans and SBA guaranteed loans. SBA guaranteed loans include
secured and unsecured loans for working capital, business expansion and
purchases of equipment and machinery.
Lines of credit are subject to annual review and approval, generally no
later than 120 days after the closing of the customer's fiscal year-end.
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Advances are typically limited to 75% of eligible accounts receivable and up to
50% on inventory. These credits are usually monitored through the review of a
receivables aging report and borrowing base report.
Term loans having maturities greater than one year are generally secured by
equipment with advances limited to no more than 75% of cost. In virtually all
cases, the Bank requires the personal guaranty of the owners or major
shareholders of the borrower.
Agricultural loans are granted to experienced farmers with demonstrated
capabilities, acceptable historical cash flows, reasonable cash flow projections
and adequate secondary sources of repayment.
COMMERCIAL REAL ESTATE LOANS
The Company's commercial real estate lending products include: construction
loans, mini-permanent and permanent financing for commercial properties,
acquisition and development loans for residential and commercial property
developers and investment property financing.
Construction loan borrowers are generally required to provide equity equal
to at least 20% of the total cost of the construction project before the Company
will advance funds on the loan. The Company advances funds pursuant to a draw
schedule and makes inspections prior to each draw request. The Company's
construction lending requirements also may include a plan and cost review,
depending on the complexity of the project. The plan and cost review and the
inspections are out-sourced by the Company to qualified professionals.
Mini-permanent and permanent financing loans are owner occupied projects
which demonstrate proven cash flows that result in a debt service coverage ratio
of at least 1.25 to 1, based on a twenty-year amortization. Mini-permanent loan
amortization may be as long as twenty-five years, but normally requires balloon
maturities within five to eight years.
The Company extends acquisition and development loans to borrowers who have
historically fulfilled their financial obligations. The relevant acquisition or
development project must demonstrate acceptable absorption periods and should
have an equity investment of at least 20% of the total project cost. Such loans
typically mature within thirty months.
Loans on investment property are subject to the same underwriting criteria
as mini-permanent loans and include a threshold debt service coverage ratio of
at least 1.25 to 1.
RESIDENTIAL AND CONSUMER LOANS
Consumer lending products include open- and closed-ended home equity and
home improvement loans, automobile, boat, and recreational vehicle loans and
loans for other asset purchases. The Company offers Visa and MasterCard credit
and debit card products to consumers and commercial customers. Credit cards are
originated in conjunction with a separate financial institution through which
the Company has a contractual relationship. Credit decisions and credit risk are
handled entirely by the third party institution. The Company continues to carry
the receivables on card balances generated prior to the initiation of this
relationship.
Loans to consumers are extended after a credit evaluation that includes a
review of the creditworthiness of the borrower, the purpose of the credit, and
the secondary source of repayment. Specifically, the lender reviews a credit
bureau report for the borrower's credit history and calculates a debt-to-income
ratio based on the borrower's gross monthly income to fixed debt payments. A
ratio higher than 40% is generally considered unacceptable. For automobile
loans, the policy requires a minimum down payment of 10% with maturities based
on the age of the vehicle.
The Company offers a variety of 1-4 family residential loan products,
including residential construction loans and residential acquisition financing.
Residential construction financing typically includes a construction loan
agreement with a construction draw schedule and third party inspections. A
commitment for permanent financing is required prior to closing. Typical
residential construction loans mature within six to twelve months. The Company
6
offers a construction/permanent package loan product in instances where the
Company acts as the permanent lender.
Residential loans are originated for the Company's portfolio, as well as
for sale in the secondary market. The maximum loan amount is based on a loan to
value ratio of 80% or less, where the value is equal to the lesser of the cost
or the appraised value. A higher loan to value ratio is available when private
mortgage insurance can be obtained. Most of these loans are originated for sale
in the secondary market and are sold on a servicing released basis. The Company
services loans originated for its portfolio.
LOAN REVIEW AND NONPERFORMING ASSETS
The Company's loan review officer is independent of the loan production and
administration process. The loan review officer has the responsibility to
perform timely reviews of portfolio credits with scope and assessment criteria
comparable to that of the Bank's regulators. Additionally, a comprehensive
annual review is conducted on all credits over $1 million, past dues,
non-performing assets and other real estate owned. Loan operations personnel
review smaller credits utilizing pre-determined standards, which include
documentation and compliance, with exceptions referred to the loan review
officer. Problem credits, which include all non-performing assets, are reviewed
at least quarterly with written documentation that includes the reason for the
problem, collateral support, a plan for resolution of the problem and a time
frame for the resolution. Delinquent loans are reviewed at least weekly by Risk
Management and monitored monthly by the Board of Directors of the Bank.
A written report is developed on the findings of the various loan review
functions and reported directly to the Audit Committee of the Company's Board of
Directors, which meets at least quarterly. The allowance for loan losses is
reviewed monthly in order to make the appropriate loan loss provision based on
the loan review findings, delinquency trends, historical loan losses and current
economic trends.
INVESTMENT SERVICES
During 2001, the Company launched its CNB Financial Services unit, which is
geared toward offering customers an alternative investment vehicle to bank
products. These services are being offered through a strategic alliance
relationship with Raymond James and are being sold through brokers who are
employed by the Bank. It is expected that this business line will offer
complementary alternatives to customer funds and will allow the Bank to continue
earning fee income on relationships that may have otherwise left the Bank.
Customer balances related to CNB Financial Services are not recorded in the
financial statements of the Company since the accounts are held with Raymond
James. The Company earns fees based upon the level of funds invested with
Raymond James that were originated through CNB Financial Services. This business
unit is in the start-up phase and did not materially contribute to the Company's
results of operations during 2001 or 2002.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability policy is carried out through the Bank's risk
management function. The Bank manages asset growth, liquidity and capital in
order to maximize income and reduce interest rate risk. The risk management
group reviews and discusses the ratio of rate-sensitive assets to rate-sensitive
liabilities, the ratio of allowance for loan losses to outstanding and
nonperforming loans, and other variables, such as expected loan demand,
investment opportunities, core deposit growth within specified categories,
regulatory changes, monetary policy adjustments and the overall state of the
economy.
INVESTMENT POLICY
The Bank's investment portfolio policy is to maximize income consistent
with liquidity, asset quality, regulatory constraints and asset/liability
objectives. The Bank invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United States
and obligations of agencies of the United States. In addition, the Bank enters
into federal funds transactions with its principal correspondent banks. Other
investments consist primarily of Federal Reserve Bank and Federal Home Loan Bank
stock that are required for the Bank to be a member of, and to conduct business
7
with, such institutions. Dividends on such investments are determined by the
institutions and are payable semi-annually or quarterly.
COMPETITION
Within each market in which the Company operates (collectively, the "CNB
Markets"), there are competing financial institutions consisting primarily of
other commercial banks, savings and loan offices and credit unions. Certain
non-bank financial institutions affiliated with Florida banks or thrift
institutions offer limited financial services, including lending and deposit
gathering activities. The Bank also competes for deposits and loans with
brokerage firms, mobile home lenders, consumer finance companies, insurance
companies, mortgage banking companies, money market mutual funds and other
financial service companies.
In addition, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Banking and Branching Act") has removed
substantially all state barriers to the acquisition of banks by out-of-state
bank holding companies. In addition, certain out-of-state bank holding companies
have entered the Florida banking market by acquiring failing thrift institutions
and commercial banks. Florida banks and bank holding companies also may enter
the CNB Markets by acquiring a financial institution, by establishing de novo
branches or by forming de novo banks.
Competition for deposit and loan business in the CNB Markets will continue
to be intense because of existing competitors, the accelerating pace of product
deregulation and the likelihood of expansion into the CNB Markets by other
institutions. Many of these institutions have significantly greater financial
resources than the Company. To compete, the Bank relies on specialized services,
responsive handling of customer needs, customer contact by Bank officers,
directors and staff, and the appeal of a locally-owned, relationship-driven
institution.
HISTORICAL GROWTH
The Bank has operated in Lake City, Columbia County, Florida since its
organization in 1986. In January 1987 the Company was formed as a bank holding
company to facilitate expansion opportunities. In 1988, the Company organized
Citizens Bank of Live Oak ("Citizens") and in 1990 opened its first de novo
branch in Fort White. In 1992 and 1993, the Bank acquired additional banking
offices in Macclenny, Lake City and Live Oak from Anchor Savings Bank. The
Company consummated its first merger with another bank holding company on April
1, 1994, when Bradford Bankshares ("Bradford") combined with the Company
resulting in a branch in Starke, Florida. On August 31, 1996, Riherd Bank
Holding Company ("Riherd") merged with the Company. The Riherd merger resulted
in three additional offices for the Bank, one of which is located in Lake
Butler, Florida and two in Gainesville. Both the Bradford and the Riherd
transactions were accounted for as purchase transactions. In August 1997, the
Bank opened its eleventh office, located in Lake City, and in June 1999 expanded
into Jacksonville with its twelfth office. The Bank opened its second
Jacksonville branch in February 2001, and opened a St. Augustine branch in June
2001. In May 2001, the Bank purchased the Lake City and Live Oak branches of
Republic Bank. In connection with the transaction, the Bank closed one of its
existing Live Oak locations and in early 2003 closed one of its Lake City
locations.
EMPLOYEES
As of December 31, 2002, the Bank had 253 full-time equivalent employees.
The Company's operations are conducted through the Bank and, consequently, the
Company does not have any separate employees.
SUPERVISION AND REGULATION
GENERAL
As a registered bank holding company, the Company is subject to the
supervision of, and regular inspection by, the Federal Reserve Board of
Governors (the "Federal Reserve") under the BHC Act. The Bank is organized as a
national banking association, which is subject to regulation, supervision and
examination by the Comptroller. The Bank is also subject to regulation by the
FDIC and other federal regulatory agencies. In addition, the Company and the
Bank are subject to various other laws and regulations and supervision and
examination by other regulatory agencies, all of which directly or indirectly
8
affect the operations and management of the Company and the Bank and their
ability to make distributions. The following discussion summarizes certain
aspects of those laws and regulations that affect the Company and the Bank.
The Holding Company is regulated by the Federal Reserve under the BHC Act
which requires every bank holding company to obtain the prior approval of the
Federal Reserve before acquiring more than 5% of the voting shares of any bank
or all or substantially all of the assets of a bank, and before merging or
consolidating with another bank holding company. The Federal Reserve (pursuant
to regulation and published policy statement) has maintained that a bank holding
company must serve as a source of financial strength to its subsidiary banks. In
adhering to the Federal Reserve policy, the Holding Company may be required to
provide financial support for a subsidiary bank at a time where absent such
Federal Reserve policy, the Holding Company may not deem it advisable to provide
such assistance.
Until March 2000, a bank holding company was generally prohibited from
acquiring control of any company which was not a bank and from engaging in any
business other than the business of banking or managing and controlling banks.
In April 1997, the Federal Reserve revised and expanded the list of permissible
non-banking activities in which a bank holding company could engage. However,
limitations continue to exist under certain laws and regulations. The
Gramm-Leach-Bliley Act repeals certain regulations pertaining to bank holding
companies and eliminates many of the previous prohibitions. Specifically, Title
I of the Gramm-Leach-Bliley Act repeals Sections 20 and 32 of Glass-Steagall Act
(12 U.S.C. 377 and 78, respectively) and is intended to facilitate affiliations
among banks, securities firms, insurance firms and other financial companies. To
further this goal, the Gramm-Leach-Bliley Act amends Section 4 of the BHC Act
(12 U.S.C. 1843) to authorize bank holding companies and foreign banks that
qualify as "financial holding companies" to engage in securities, insurance and
other activities that are financial in nature or incidental to a financial
activity. The activities of bank holding companies that are not financial
holding companies will continue to be limited to activities authorized currently
under the BHC Act, such as activities that the Federal Reserve previously has
determined in regulations and orders issued under section 4(c)(8) of the BHC Act
to be closely related to banking and permissible for bank holding companies.
Pursuant to the Interstate Banking and Branching Act, bank holding
companies are able to acquire banks in states other than their respective home
states, without regard to the permissibility of such acquisitions under state
laws. The transaction would still be subject to any state requirement that the
Bank has been organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the respective bank holding company,
prior to or following the proposed acquisition, controls no more than 10% of the
total amount of deposits of insured depository institutions in the United States
and less than 30% of such deposits in that state (or such lesser or greater
amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. Florida does not
prohibit interstate branching within the state. Furthermore, pursuant to the
Interstate Banking and Branching Act, a bank is now able to open new branches in
a state in which it does not already have banking operations if such state
enacts a law permitting de novo branching.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on the Company
and the Bank cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve, the Comptroller and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, those regulatory agencies may from time to
time require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth. The Federal Reserve risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for credit losses up to 1.25% of risk-weighted assets. The sum of Tier 1 and
Tier 2 capital less investments in unconsolidated subsidiaries represents
qualifying total capital, at least 50% of which must consist of Tier 1 capital.
Risk-based capital ratios are calculated by dividing Tier 1 and total capital by
9
risk-weighted assets. Assets and off-balance sheet exposures are assigned to one
of four categories of risk weights, based primarily on relative credit risk. The
minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%.
The Company's Tier 1 and total risk-based capital ratios under these guidelines
at December 31, 2002, were 7.4% and 8.5%, respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. The Company's leverage ratio at December 31, 2002 was 6.3%. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among
other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized), and requires
the respective federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee that bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of 5% of the bank's assets at the time
it became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors. In
addition, FDICIA requires the various regulatory agencies to prescribe certain
non-capital standards for safety and soundness related generally to operations
and management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of at least 8% and a
leverage ratio of at least 4%, or 3% in some cases.
Banking agencies have also adopted regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. That
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have adopted final regulations
requiring regulators to consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance sheet positions) in the determination of a bank's
capital adequacy. Concurrently, banking agencies have proposed a methodology for
evaluating interest rate risk. After gaining experience with the proposed
measurement process, those banking agencies intend to propose further
regulations to establish an explicit risk-based capital charge for interest rate
risk.
DISTRIBUTIONS
The Company's primary source of funds for cash distributions to its
shareholders is dividends received from the Bank. The Bank is subject to various
general regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain capital above regulatory minimums.
The appropriate federal regulatory authority is authorized to determine under
certain circumstances relating to the financial condition of the bank or bank
holding company that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment of dividends.
In addition to the foregoing, the ability of the Company and the Bank to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of the Bank is further
subject to the prior claims of creditors of the Bank.
10
"SOURCE OF STRENGTH" POLICY
According to Federal Reserve policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank. PROPERTIES
The Bank currently operates out of fourteen branch offices, one
administrative office and a non-customer operations center. All branches have
automated teller machines ("ATMs"). The Company owns the following properties:
APPROXIMATE SQUARE YEAR ESTABLISHED/
OFFICE LOCATION FOOTAGE ACQUIRED
- ------------------------------------------------------------------------------------------------------------------------------------
LAKE CITY (COLUMBIA COUNTY)
205 North Marion Avenue (1) ..................................... 22,000 1986
187 SW Baya Avenue .............................................. 10,100 1993
2844 U.S. 90 West ............................................... 2,900 1997
160 NW Main Blvd ................................................ 7,600 2001
1 CNB Place, East U.S. 90 (2) ................................... 20,800 1996
LIVE OAK (SUWANNEE COUNTY)
205 White Avenue, S.E ........................................... 6,000 1988
1562 South Ohio Avenue .......................................... 2,000 1993
535 South Ohio Avenue ........................................... 8,000 2001
FORT WHITE (COLUMBIA COUNTY)
7075 SW U.S. Hwy 27 ............................................. 2,200 1990
MACLENNEY (BAKER COUNTY)
595 South Sixth Street .......................................... 4,800 1992
STARKE (BRADFORD COUNTY)
606 West Madison Street ......................................... 8,000 1994
GAINESVILLE (ALACHUA COUNTY)
5027 Northwest 34th Street ...................................... 2,000 1996
7515 West University Avenue ..................................... 12,000 2000
11411 N. State Rd. 121 ........................................... 4,500 1996
LAKE BUTLER (UNION COUNTY)
300 West Main Street ............................................ 6,800 1996
JACKSONVILLE (DUVAL COUNTY)
9715 Gate Parkway North ......................................... 26,000 2000
ST. AUGUSTINE (ST. JOHNS COUNTY)
1980 U.S. 1 South ................................................ 5,000 2000
- -------------------------
(1) Main office and administrative office.
(2) Location of the operations center.
11
The Company also leases a branch in the Mandarin area of Jacksonville
(Duval County), which opened in February 2001, and a branch under construction
in the Magnolia Parke area of Gainesville, Florida that is expected to open in
2003. The Company also owns 1.57 acres of unimproved land in Glen St. Mary,
Florida that was acquired in 2001. The land will be used for the construction of
a branch banking facility that is expected to open in 2003.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of their properties are subject; nor are there material
proceedings known to be contemplated by any governmental authority; nor are
there material proceedings known to the Company, pending or contemplated, in
which any director, officer, affiliate or any principal security holder of the
Bank or the Company, or any associate of any of the foregoing is a party or has
an interest adverse to the Company.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
K. C. Trowell 64 Mr. Trowell is Chairman, Chief Executive
Officer and President of the Company and the
Bank. He was elected to the Board of Directors
in 1987 and serves as Chairman of the
Executive Committee of the Board of Directors
of the Company and the Bank. He has served as
the Chairman and Chief Executive Officer of
the Company since its inception in 1987. Mr.
Trowell is a Lake City, Florida, native and
has been actively involved in commercial
banking management in North Florida for over
30 years. He has also held management
positions with Bank of America in Lake City
(and its predecessors), American Bank of
Jacksonville, and Barnett Banks, Inc. in
Jacksonville. He is a former Chairman of the
Board of Trustees of Florida Bankers Insurance
Trust. He is a past director of Community
Bankers of Florida, past director of the
Columbia County Committee of 100, a founding
director of North Central Florida Areawide
Development Company, and a former board member
and chairman of both Lake City Medical Center
and Columbia County Industrial Development
Authority.
G. Thomas Frankland 56 Mr. Frankland is the Executive Vice President
and Chief Financial Officer of the Company and
the Bank. Mr. Frankland served as Vice
President and Chief Financial Officer of
AirNet Communications Corporation in
Melbourne, Florida, from March 1998 until he
joined the Company in November 1998. From May
1994 until August 1996, Mr. Frankland was Vice
Chairman and Chief Financial Officer of Ideon
Group, Inc. ("Ideon"). Following the
acquisition of Ideon by CUC International,
Inc. ("CUC"), in August 1996, Mr. Frankland
continued in a consulting capacity with CUC
through December 1997. Prior to May 1994, Mr.
Frankland was a partner with Price Waterhouse
LLP. During his 24 years with Price Waterhouse
LLP, including the seven years he served as
managing partner of the Jacksonville office,
he specialized primarily in the financial
services industry. He currently serves on the
Audit Committee of the Board of Directors of
the University of Florida Foundation, the
Warrington College of Business Advisory
Council, the Fisher School of Accounting
Steering Committee and the Board of Directors
of the North Florida Land Trust.
12
Martha S. Tucker 52 Ms. Tucker has served as Senior Vice President
and Controller of the Company and the Bank
since July 1997. From 1991 through 1997, Ms.
Tucker was Vice President and Cashier of the
Bank. From 1988 through 1991, Ms. Tucker was
Cashier for Citizens Bank of Live Oak, which
merged into the Bank in November 1992. From
1986 to 1988, Ms. Tucker served as Assistant
Cashier for the Bank and prior to 1986 held
management positions with NationsBank of Live
Oak (and its predecessors). Ms. Tucker is a
life-long resident of Live Oak, Florida and
has over 35 years of banking experience.
Robert E. Cameron 58 Mr. Cameron serves as the Southern Division
President of the Bank. Prior to joining the
Company in April 1998, Mr. Cameron was a
Senior Vice President of Barnett Bank of
Alachua County from 1988 until 1998. He also
was a member of the Board of Directors of
United Gainesville Community Development
Board. He has worked in the banking industry
for 33 years. Currently he is a member of the
Board of Directors of the Gainesville Builders
Association and Child Care Resources.
John D. Kennedy 46 Mr. Kennedy has served as the TriCounty
Division President of the Bank since August
1998. From 1996 through 1998, Mr. Kennedy was
the President of the Bank's Macclenny branch.
From October 1973 until August 1996 he was
with The Citizens Bank of Macclenny, where he
served as President beginning in January 1987.
Mr. Kennedy serves on the Lake City Community
College Endowment Trust Board. He is a member
of the Board of Directors of Baker County
Council on Aging and Baker County Tip-Off
Club. He is also Chairman of the Baker County
Education Foundation and President of the
Girls Softball League of Baker County. Mr.
Kennedy has 30 years of banking experience.
David H. Sheffield 39 Mr. Sheffield serves as the First Coast
Division President overseeing banking
activities in Duval and St. Johns counties.
Mr. Sheffield joined CNB National Bank in
1999. He has 17 years of banking experience in
the Jacksonville market, primarily in the
commercial lending functional area. Mr.
Sheffield began his career with Florida
National Bank in 1986 and has held positions
with Enterprise National Bank of Jacksonville
and Compass Bank in various lending and
management capacities. Mr. Sheffield is a
graduate of Clemson University with a B.S. in
Financial Management. He is also a graduate of
the ABA Commercial Lending Graduate School at
the University of Oklahoma and the Graduate
School of Banking at Louisiana State
University. He is actively involved in various
community and industry organizations and is
active as an elder at his church.
Suzanne M. Norris 39 Ms. Norris currently serves as Division
President for Suwannee Valley as well as
Senior Credit Administrator, a role she
assumed in 1997. Ms. Norris came to the Bank
in September 1996 and has 17 years of banking
experience, working in various management and
lending positions with NationsBank in St.
Petersburg, Tampa and Lake City, including
acting as commercial market manager/senior
banking executive for Lake City and
Gainesville from June 1995 to September 1996.
Ms. Norris, a graduate of the University of
Florida, has been active in the community,
having served as the President of the Lake
City/Columbia County Chamber of Commerce. She
currently serves on the Board of Trustees for
Lake City Community College, the Board of
Directors for the United Way of Suwannee
Valley and Epiphany Catholic School and is a
member of Altrusa.
13
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock. As of March 14, 2003, there were 6,125,500
shares of Common Stock issued and outstanding and 509 shareholders of record. In
addition, there were 536,253 shares subject to currently exercisable options. On
January 29, 1999, the Company's common stock began trading on the NASDAQ
National Market under the symbol "CNBB", resulting from the issuance of
1,250,000 shares of common stock in the Company's initial public offering at
$10.25 per common share. Proceeds from the offering net of underwriting discount
and expenses totaled $11.4 million. The Company contributed $10.0 million of the
$11.4 million net proceeds from the offering to CNB National Bank in February
1999. There is no trading information for any prior years, since there was not
an established market for the Company's common stock. See Table 12: "Selected
Quarterly Data" in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the quarterly market price for the last two fiscal
years.
Shareholders' equity at December 31, 2002 was $50.9 million, as compared to
$46.7 million at December 31, 2001. On July 15, 1998, the Company declared a
two-for-one stock split for shareholders of record on August 10, 1998, effective
August 17, 1998.
Company dividends for 2002, 2001 and 2000 consisted of the payment of
quarterly cash dividends in the amount of $0.05 per common share.
The Company's ability to pay dividends on the Common Stock depends
significantly on the ability of the Bank to pay dividends to the Company in
amounts sufficient to service its obligations. Such obligations include
principal and interest payments on outstanding long-term debt and may include an
obligation to make any payments with respect to securities issued in the future
which have an equal or greater dividend preference to the Common Stock. The Bank
may also issue additional capital stock or incur indebtedness, subject to
certain borrowing covenants outlined in the Company's line of credit agreement,
as amended, entered into with another bank during 2001 (see Management's
Discussion and Analysis - Item 7 of Part II). Furthermore, the regulations of
the Comptroller, regulatory capital levels and the net income of the Bank
determine its ability to pay dividends or make other capital distributions.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
Dollars in thousands except per share 2002 2001 2000 1999 1998
information
- ------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
Interest Income $ 41,398 $ 40,417 $ 32,061 $ 23,758 $ 21,119
Interest Expense (15,646) (19,629) (14,736) (9,052) (9,417)
--------- --------- ---------- --------- ----------
Net Interest Income 25,752 20,788 17,325 14,706 11,702
Provision for Loan Loss (2,375) (2,050) (1,350) (1,160) (710)
--------- --------- ---------- --------- ----------
Net Interest Income After
Provision for Loan Loss 23,377 18,738 15,975 13,546 10,992
Non-Interest Income 6,304 5,633 3,338 2,952 2,392
Non-Interest Expense (21,156) (19,836) (15,481) (11,994) (9,298)
--------- --------- ---------- --------- ----------
Income Before Income Taxes 8,525 4,535 3,832 4,504 4,086
Income Taxes (3,141) (1,594) (1,325) (1,563) (1,407)
--------- --------- ---------- --------- ----------
Net Income $ 5,384 $ 2,941 $ 2,507 $ 2,941 $ 2,679
========= ========= ========== ========= ==========
- ------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Basic Earnings $ 0.88 $ 0.48 $ 0.41 $ 0.49 $ 0.55
Diluted Earnings 0.87 0.48 0.41 0.48 0.55
Book Value 8.31 7.64 7.32 7.04 6.36
Dividends 0.20 0.20 0.20 0.20 0.20
Actual Shares Outstanding 6,125,500 6,106,453 6,099,376 6,116,070 4,856,770
Basic Weighted Average Shares Outstanding 6,104,050 6,094,670 6,095,471 5,995,474 4,856,770
Diluted Weighted Average Shares Outstanding 6,215,775 6,188,477 6,134,270 6,069,737 4,897,922
- ------------------------------------------------------------------------------------------------------------------
KEY RATIOS:
Return on Average Assets 0.81% 0.53% 0.62% 0.91% 0.93%
Return on Average Shareholders' Equity 11.03 6.43 5.74 7.03 8.92
Dividend Payout 22.73 41.67 48.78 40.82 36.36
Efficiency Ratio 66.00 75.08 74.92 67.92 65.97
Total Risk-Based Capital Ratio 8.52 9.00 12.00 17.25 16.62
Average Shareholders' Equity to Average
Assets 7.37 8.23 10.82 13.01 10.43
Tier 1 Capital to Average Assets/Leverage
Ratio 6.31 6.50 9.80 12.70 9.70
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION AT YEAR END:
Assets $ 730,674 $ 612,021 $ 467,593 $ 346,076 $ 311,565
Gross Loans 605,785 511,647 379,859 266,084 187,015
Deposits 648,636 532,891 367,686 288,203 265,109
Borrowings 25,446 28,148 51,142 12,063 12,570
Shareholders' Equity 50,921 46,669 44,636 43,075 30,896
- ------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Banking Locations 14 15 12 12 11
Full-Time Equivalent Employees 253 246 212 183 149
- ------------------------------------------------------------------------------------------------------------------
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, which
involve risks and uncertainties which are described in this Annual Report and in
other filings with the Securities and Exchange Commission (the "SEC"). The
actual results of CNB Florida Bancshares, Inc. (the "Company" or "CNB") may
differ significantly from the results discussed in the forward-looking
statements. Factors that may cause such differences include, but are not limited
to, increased competitive pressures among depository and other financial
institutions, changes in the interest rate environment that may reduce margins,
general economic or business conditions in the Company's markets that lead to a
deterioration in credit quality or reduced loan demand, legislative or
regulatory changes and competitors of the Company that may have greater
financial resources and develop products or services that enable such
competitors to compete more successfully than the Company. Other factors that
may cause actual results to differ from the forward-looking statements include
customer acceptance of new products and services, changes in customer spending
and saving habits and the Company's success in managing costs associated with
expansion. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with Selected
Historical Financial Information and the Consolidated Financial Statements of
the Company, which are included in this Form 10-K.
Overview
The following analysis reviews important factors affecting the financial
condition and results of operations of CNB Florida Bancshares, Inc. for the
periods shown. This section should be read in conjunction with the Consolidated
Financial Statements and related notes. The purpose of this discussion is to
facilitate a better understanding of the major factors and trends that affect
the Company's financial condition and earnings performance, and how the
Company's performance during 2002 compares with prior years. Throughout this
section, CNB Florida Bancshares, Inc. and its subsidiary, CNB National Bank, are
referred to as "CNB" or "the Company".
On January 29, 1999, CNB completed an initial public offering of 1,250,000
shares of common stock, which began trading on the NASDAQ National Market,
giving CNB shareholders greater access to purchasing or selling shares of common
stock. In addition, CNB obtained additional capital to support its expansion
plans, as well as for general corporate purposes. Of the $11.4 million net
proceeds from the offering, the Company contributed $10.0 million as capital to
CNB National Bank .
The Company continues to execute on its strategic growth initiatives that
were put in place during 1998. During 2002 the Company began laying the
groundwork for construction of a new branch on US 90 in Glen St. Mary and
entered into a lease agreement for a branch in the Magnolia Parke section of
Gainesville. Both of these branches are expected to open for business in 2003.
In 2001 the Company added two branches to its First Coast market (Jacksonville
and St. Augustine) and acquired two branches from Republic Bank (Lake City and
Live Oak). The branch acquisitions occurred in May 2001 and resulted in the
16
addition of loans, deposits and premises and equipment of approximately $12
million, $62 million and $2 million, respectively. In connection with the
acquisition, the Bank recorded a core deposit intangible of $6 million, which is
being amortized over its estimated useful life of 10 years. The Company's
conversion to an improved data processing platform in the fourth quarter of 2000
and the move into the expanded Operations Center in the first half of 2001 has
improved operational support to our growth initiatives and has allowed us to
become more customer focused and cost-efficient.
The Company officially relocated its corporate offices to Jacksonville,
Florida effective January 2001. Operational headquarters for CNB National Bank
continue to be located in Lake City.
Results of Operations
The Company's earnings for 2002 were $5.4 million, or $0.87 per diluted
share, compared to $2.9 million, or $0.48 per diluted share, and $2.5 million,
or $0.41 per diluted share, in 2001 and 2000, respectively. These results
reflect growth in net interest income and non-interest income. The decline in
interest expense reflects the impact of declining interest rates throughout
2002. Total assets increased to $730.7 million at December 31, 2002 compared to
$612.0 million at December 31, 2001, an increase of 19%. Included in the results
for 2001 is the impact of the acquisition of the Lake City and Live Oak branches
of Republic Bank in May 2001.
Net Interest Income/Margins
Net interest income is the single largest source of revenue for the Bank
and consists of interest and fee income generated by earning assets, less
interest expense paid on interest bearing liabilities. The Company's main
objective is to manage its assets and liabilities to provide the largest
possible amount of income while balancing interest rate, credit quality,
liquidity and capital risks. Net interest income was $25.8 million for 2002,
compared to $20.8 million and $17.3 million for the comparable prior year
periods of 2001 and 2000, respectively. The increase over 2001 was due to growth
in loans, transaction deposits and improved rates and spreads. During the first
half of 2003, we expect increased margin pressure as interest rates remain at
historically low levels. With our asset sensitivity, however, margin enhancement
is anticipated once rates rise, as is expected later in the year.
Average loan growth of $95 million was the main contributor to the increase
in average earning assets of $106.7 million, or 21%. Increases in time, money
market and interest bearing deposits, including those accounts acquired from
Republic Bank, were the main contributors in the $103.5 million, or 26%, growth
in average interest bearing liabilities.
The Company's net interest margin increased to 4.24% in 2002, compared to
4.15% in 2001. The increase in the margin is due to higher transaction deposit
balances and improved rates and spreads. Table 1 presents a comparative earning
asset composition as well as earning asset yields and interest bearing liability
rates for 2002, 2001 and 2000. Table 1a shows the changes in net interest income
by category due to shifts in volume and rates for years presented.
17
Table 1: Average Balances, Yields and Rates
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Interest Interest Interest
Average Income or Average Average Income or Average Average Income or Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars in thousands)
ASSETS:
Federal Funds Sold $ 4,697 $ 73 1.55% $ 2,773 $ 102 3.68% $ 3,429 $ 208 6.07%
Investment Securities
Available for Sale 43,984 1,891 4.30 33,167 1,864 5.62 33,314 2,110 6.33
Investment Securities
Held to Maturity 1,667 99 5.94 6,278 384 6.12 9,869 572 5.80
Loans (1) 553,476 39,275 7.10 458,023 38,055 8.31 317,345 29,112 9.17
Interest Bearing Deposits 3,559 60 1.69 401 12 2.99 895 59 6.59
-------- --------- ------- -------- -------- ---- --------- --------- ----
TOTAL EARNING ASSETS 607,383 41,398 6.82 500,642 40,417 8.07 364,852 32,061 8.78
All Other Assets 55,173 55,233 38,424
-------- -------- ---------
TOTAL ASSETS $662,556 $555,875 $ 403,276
======== ======== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
NOW & Money Markets $192,108 3,432 1.79% $148,026 3,899 2.63% $ 110,387 3,731 3.38%
Savings 21,907 155 0.71 18,707 196 1.05 17,095 238 1.39
Time Deposits 291,205 11,213 3.85 235,010 13,656 5.81 151,674 9,019 5.95
Federal Funds Purchased and
Repurchase Agreements 13,174 191 1.45 14,609 552 3.78 9,565 572 5.98
Short Term Borrowings 33 1 3.04 20,932 1,061 5.07 17,377 1,176 6.77
Other Borrowings (2) 10,000 654 6.54 4,667 265 5.68 - - -
-------- --------- ------- -------- -------- ---- --------- --------- ----
TOTAL INTEREST BEARING
LIABILITIES 528,427 15,646 2.96 441,951 19,629 4.44 306,098 14,736 4.81
Demand Deposits 80,302 64,337 49,418
Other Liabilities 4,999 3,838 4,117
Shareholders' Equity 48,828 45,749 43,643
-------- -------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $662,556 $555,875 $ 403,276
======== ======== =========
---- ---- ----
INTEREST SPREAD (3) 3.86% 3.63% 3.97%
==== ==== ====
--------- -------- ---------
NET INTEREST INCOME $ 25,752 $ 20,788 $ 17,325
========= ======== =========
NET INTEREST MARGIN (4) 4.24% 4.15% 4.75%
==== ==== ====
- ----------
(1) Interest income on average loans includes loan fee recognition of $494,000,
$979,000 and $969,000 in 2002, 2001 and 2000 respectively. Nonperforming
loans are included in the average loan balance. Income on such
nonperforming loans is recognized on a cash basis.
(2) The interest expense and average rate on other borrowings includes the
impact of an interest rate swap that was entered into as a hedge of
interest rate risk associated with the underlying term debt in October
2001. Under the terms of the interest rate swap, the Company pays a fixed
rate of 6.45% and receives a floating rate of interest of 3-month Libor
plus 170 basis points. Interest on the swap and term debt is calculated
using a 360-day year.
(3) Represents the average rate earned minus average rate paid.
(4) Represents net interest income divided by total earning assets.
18
Table 1a: Analysis of Changes in Interest Income and Expense
NET CHANGE DECEMBER 31, NET CHANGE DECEMBER 31,
2001-2002 ATTRIBUTABLE TO: 2000-2001 ATTRIBUTABLE TO:
-------------------------- --------------------------
Net Net
Volume (1) Rate (2) Change Volume (1) Rate (2) Change
(thousands)
INTEREST INCOME:
Federal Funds Sold $ 71 $ (100) $ (29) $ (40) $ (66) $ (106)
Investment Securities Available for Sale 608 (581) 27 (9) (237) (246)
Investment Securities Held to Maturity (282) (3) (285) (208) 20 (188)
Loans 7,930 (6,710) 1,220 12,886 (3,943) 8,943
Interest Bearing Deposits 94 (46) 48 (33) (14) (47)
-------- -------- -------- -------- -------- --------
Total 8,421 (7,440) 981 12,596 (4,240) 8,356
INTEREST EXPENSE:
NOW & Money Markets 1,162 (1,629) (467) 1,272 (1,104) 168
Savings 34 (75) (41) 23 (65) (42)
Time Deposits 3,266 (5,709) (2,443) 4,956 (319) 4,637
Federal Funds Purchased and Repurchase Agreements (54) (307) (361) 302 (322) (20)
Short Term Borrowings (1,059) (1) (1,060) 241 (356) (115)
Other Borrowings 304 85 389 265 - 265
-------- -------- -------- -------- -------- --------
Total 3,653 (7,636) (3,983) 7,059 (2,166) 4,893
-------- -------- -------- -------- -------- --------
Net Interest Income $ 4,768 $ 196 $ 4,964 $ 5,537 $ (2,074) $ 3,463
======== ======== ======== ======== ======== ========
- ----------
(1) The volume variance reflects the change in the average balance outstanding
multiplied by the actual average rate during the prior period.
(2) The rate variance reflects the change in the actual average rate multiplied
by the average balance outstanding during the prior period. Changes which
are not solely due to volume changes or solely due to rate changes have
been attributed to rate changes.
Non-Interest Income
Non-interest income totaled $6.3 million in 2002, an increase of 12% from
the $5.6 million in 2001, and a 69% increase from 2000. Service charges on
deposit accounts increased $299,000 or 10% in 2002, compared with $528,000 or
22% in 2001. Secondary market mortgage sales increased in 2002 by $206,000 or
11%. The increase in secondary market mortgage sales was primarily attributed to
a strong housing market in the local economy and a continuation of historically
low interest rates. Other non-interest income, which includes credit card fees,
credit life insurance income, safe deposit box fees, net gains and losses from
sale of securities and other miscellaneous fees, increased $166,000 in 2002
compared to $195,000 in 2001. The increase in other fee income in 2002 was
primarily attributed to a $66,000 increase in securities gains and a $50,000
increase in investment services income. The investment securities sold in the
fourth quarter of 2002 were short-dated callable agency instruments with
premiums resulting from movements in interest rate markets. The securities were
sold as an economic hedge of a decline in net interest yield, which resulted
from a lowering of market interest rates during the fourth quarter.
Non-interest income as a percentage of average assets was 0.95% in 2002
compared to 1.01% and 0.83% in 2001 and 2000, respectively.
Non-Interest Expense
Non-interest expense increased by $1.3 million, or 7%, for 2002, compared
to an increase of $4.4 million, or 28%, for 2001. During 2002, non-interest
expenses as a percentage of average assets decreased to 3.19%, compared to 3.57%
and 3.84% in 2001 and 2000, respectively.
Salaries and employee benefits for 2002 increased $843,000 from 2001
compared to $1.7 million from 2000. As a percentage of average total assets,
salaries and employee benefits have decreased to 1.67% in 2002 compared to 1.84%
and 2.12% in 2001 and 2000, respectively.
19
Occupancy expenses (including furniture, fixtures & equipment) increased to
$3.4 million in 2002 compared to $3.1 million in 2001 and $2.2 million in 2000.
The main contributing factor for the 2002 increase was higher depreciation due
to a full year of depreciation for the Operations Center and the two purchased
Republic Branches. The major factors affecting the increase in occupancy
expenses from 2000 to 2001 relate to lease expense, higher real estate taxes,
utilities and depreciation on furniture and equipment for the new branches
opened in Jacksonville and St. Augustine, the two branches purchased from
Republic Bank, the relocation during 2000 into new facilities in Jacksonville
and Gainesville and the expansion of the Lake City Operations Center. CNB
continues to monitor and assess its facility and equipment needs as it positions
itself for future growth and expansion.
Other operating expenses at CNB increased 3% in 2002 compared to 2001 and
37% in 2001 compared to 2000. The increase in 2002 was attributable to: (1) an
increase of $224,000 in data processing fees resulting from higher transaction
volume with our core processor, utilization of additional processing
applications and contractual fee increases; (2) an increase of $169,000 in
telephone and related expenses, primarily due to an enhancement of bandwidth
capacity between each of the Company's branches; (3) an increase of $203,000 in
amortization of intangible assets due to the core deposit amortization on the
Republic branches for a full year; (4) an increase of $71,000 in legal and
professional costs. The increases in these areas were offset by decreases in
advertising, administrative, supplies and other operating expenses. The main
contributing factors to the increase in other operating expenses in 2001 was a
$120,000 increase in postage and delivery due to additional courier runs, an
increase of $454,000 in data processing fees resulting from the conversion to an
improved data processing platform and an increase of $364,000 in amortization
expense related to the core deposit intangible from the Republic Bank
acquisition. Other operating expenses in both 2001 and 2000 included goodwill
amortization of $70,000. Beginning in 2002, amortization of goodwill was
discontinued in accordance with the adoption of Statement of Financial
Accounting Standards No. 142 as discussed in Note 2 of Notes to Consolidated
Financial Statements.
The following table details the areas of significance in other operating
expenses.
Table 2: Other Operating Expenses
(Dollar amounts in thousands)
Year Ended December 31,
2002 2001 2000
---- ---- ----
Data processing $ 1,328 $ 1,104 $ 650
Communications 764 595 584
Amortization of intangible assets 746 543 179
Postage and delivery 700 671 551
Legal and professional 689 618 487
Advertising and promotion 532 687 541
Supplies 410 578 404
Loan expenses 242 248 194
Regulatory fees 239 255 149
Administrative 163 211 196
Education expense 131 101 62
Dues and subscriptions 97 100 103
Director fees 88 70 72
Other general operating 79 67 174
Insurance and bonding 76 105 89
Other 350 518 287
-------- --------- --------
Total other operating expenses $ 6,634 $ 6,471 $ 4,722
======== ========= ========
20
Income Taxes
The effective tax rate for the year ended December 31, 2002 was 36.8%,
compared to 35.2% for 2001 and 34.6% for 2000. The consolidated provision for
income taxes increased to $3.1 million in 2002, compared to $1.6 million in 2001
and $1.3 million in 2000.
Liquidity and Interest Rate Sensitivity
Liquidity is defined as the ability of the Company to meet anticipated
demands for funds under credit commitments and deposit withdrawals at a
reasonable cost on a timely basis. Management measures the Company's liquidity
position by giving consideration to both on-and off- balance sheet sources of
and demands for funds on a daily and weekly basis. These funds can be obtained
by converting assets to cash or by attracting new deposits. Average liquid
assets (cash and amounts due from banks, interest-bearing deposits in other
banks, federal funds sold and investment securities available for sale) totaled
$69.8 million and represented 11.9% of average total deposits during 2002,
compared to $55.0 million and 11.8% for 2001. The Company's loan to deposit
ratio at December 31, 2002 was 93%, compared to 96% at the end of 2001.
In addition to core deposit growth (defined as all deposits other than time
deposits in excess of $100,000), sources of funds available to meet liquidity
demands include cash received through ordinary business activities such as the
collection of interest and fees, federal funds sold, loan and investment
maturities and lines for the purchase of federal funds by the Company from its
principal correspondent banks. The Bank is also a member of the Federal Home
Loan Bank and has access to short-term and long-term funds. In addition, the
Company entered into a line of credit with one of its correspondent banks in
April 2001. The agreement was amended in October 2001 to reflect the following
structures: (1) a $3 million revolving line of credit maturing on June 30, 2002
(subsequently renewed through June 30, 2003) with interest floating quarterly at
3-month Libor plus 145 basis points; and (2) a $10 million term loan maturing
October 3, 2006 with interest floating quarterly at 3-month Libor plus 170 basis
points. Semi-annual principal payments of approximately $714,000 begin in 2004.
The Company also entered into a $10 million pay-fixed interest rate swap with
the same bank. The fixed rate under the interest rate swap is 6.45% and the
variable rate is based on 3-month Libor plus 170 basis points. The swap matures
October 3, 2006 and has been designated as a cash flow hedge of the variable
interest payments on the $10 million term loan noted in (2) above. The fair
value of the interest rate swap at December 31, 2002 was approximately
($691,000). There was $1 million outstanding on the $3 million line of credit on
December 31, 2002. The term loan, line of credit and interest rate swap are all
collateralized by 100% of the common stock of the Bank.
In connection with the term loan and line of credit agreement, the Company
is required to maintain compliance with certain covenants and restrictions. The
following financial covenants are to be maintained on a quarterly basis and are
calculated at the Bank-level:
o Interest coverage ratio of greater than or equal to 2.00x through
September 30, 2003.
o Debt service coverage ratio of greater than or equal to 0.85x through
September 30, 2002; 1.00x from October 1, 2002 through September 30,
2003; 1.25x from October 1, 2003 through September 30, 2004; and 1.50x
from October 1, 2004 through maturity.
o Ratio of non-performing assets to total loans plus other real estate
owned and repossessed assets of less than or equal to 1.25%.
o Maintenance of tier 1 and total risk based capital ratios that meet the
benchmarks for consideration as a "well-capitalized" institution
(currently 6% and 10%, respectively). Also, maintenance of a leverage
capital ratio of at least than 6%.
In addition, the Company is subject to the following restrictions:
o No additional debt is permitted without consent of the lender.
o No increases in dividends paid by the Company to its common
shareholders are permitted without consent of the lender.
21
Failure to maintain any of these covenants would place the Company in
default of the line of credit agreement. In such a case, absent any waivers
obtained from the lender, all amounts payable could be accelerated and become
due immediately. As of December 31, 2002, the Company was in compliance with all
covenants, except as noted below.
At December 31, 2002, the Bank's ratio of non-performing assets to total
loans plus other real estate owned and repossessed assets totaled 1.33%, which
exceeded the amount stipulated in the agreement of 1.25%. The Bank obtained a
waiver of default with respect to the non-performing assets ratio requirement as
of December 31, 2002.
The level of commitments to fund additional borrowings and standby letters
of credit also impacts the Company's liquidity position. These commitments, when
drawn, are generally funded through deposit inflows, loan and investment
maturities, interest receipts and, to the extent necessary, short term purchases
of federal funds. The Company's borrowing capacity under the FHLB is also
available to fulfill commitments to lend. Since many commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The amount of collateral obtained, if any,
is based on management's credit evaluation in the same manner as though an
immediate credit extension were to be granted. Commitments to extend credit and
standby letters of credit amount to approximately $147,315,000 and $8,889,000,
respectively, at December 31, 2002 and expire as outlined in the table below (in
thousands):
Unfunded Standby
Commitments Letters of Credit
----------- -----------------
2003 $ 30,758 $ 7,971
2004 37,561 519
2005 28,605 399
2006 8,939 -
2007 10,614 -
Thereafter 30,838 -
---------- ---------
$ 147,315 $ 8,889
========== =========
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates. The
rate sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities, at a given time interval, including both
floating rate instruments and instruments that are approaching maturity.
Management generally attempts to maintain a balance between rate-sensitive
assets and liabilities as the exposure period is lengthened to minimize the
overall interest rate risks to the Company.
The Company's gap and liquidity positions are reviewed on a regular basis
by management to determine whether or not changes in policies and procedures are
necessary to achieve financial goals. Included in the review is an internal
analysis of the possible impact on net interest income due to market changes in
interest rates. Based on this internal analysis, at December 31, 2002, a gradual
increase in interest rates of 200 basis points would have increased net interest
income over the ensuing twelve-month period by 3.76%. A gradual decrease in
interest rates of 200 basis points over this same period would have decreased
net interest income by 3.83% as compared to a stable rate environment. At
December 31, 2001, the internal analysis estimated an increase in net interest
income of 1.09% and a decrease in net interest income of 1.11% for a similar 200
basis point increase and decrease in interest rates, respectively. The overall
interest rate sensitivity position increased over the prior year as the Company
focused on variable-rate lending and growth in demand and time deposits. The
Company considers this asset-sensitive position desirable given the perceived
likelihood of increasing interest rates over the foreseeable horizon.
The Company also monitors the Bank's market value of equity and its net
economic value ratio on a monthly basis. Market value of equity is defined as
the difference between the estimated fair value of the Bank's assets less the
estimated fair value of liabilities. The net economic value ratio is the market
value of equity divided by the market value of assets and measures the Bank's
capitalization, taking into account balance sheet gains and losses. At December
31, 2002, the Bank's net economic value ratio was 10.04% and 10.13%, assuming a
gradual increase or decrease, respectively, in interest rates of 200 basis
points over a 12-month period. At December 31, 2001, the Bank's net economic
value ratio was 10.53% and 10.93% for similar changes in interest rates.
22
Table 3, "Rate Sensitivity Analysis" presents rate sensitive assets and
liabilities, separating fixed and variable interest rate categories. The
estimated fair value of each instrument category is also shown in the table.
While these fair values are based on management's judgment of the most
appropriate factors, there is no assurance that, were the Company to have
disposed of such instruments on December 31, 2002, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances.
23
Table 3: Rate Sensitivity Analysis
December 31, 2002
(Dollars in thousands) Fair
1 Year 2 Years 3 Years 4 Years 5 Years Beyond TOTAL Value
------ ------- ------- ------- ------- ------ ----- -----
INTEREST-EARNING ASSETS:
- ------------------------
Gross Loans
Fixed Rate Loans $ 112,930 $ 51,890 $ 38,900 $ 34,665 $ 53,539 $ 95,892 $387,816 $407,523
Average Interest Rate 7.04% 7.33% 7.75% 7.50% 7.30% 7.00% 7.22%
Variable Rate Loans 62,814 27,520 21,583 13,545 9,841 82,666 217,969 218,028
Average Interest Rate 4.81% 5.07% 5.24% 5.70% 6.72% 7.49% 6.04%
Investment Securities(1)
Fixed Rate Investments 8,064 14,497 5,474 - - 17,317 45,352 46,201
Average Interest Rate 2.41% 5.05% 4.37% 4.45% 4.27%
Variable Rate Investments - - - - - 471 471 484
Average Interest Rate 5.34% 5.34%
Federal Funds Sold 5,400 - - - - - 5,400 5,400
Average Interest Rate 1.17% 1.17%
Other Earning Assets(2) 15,212 - - - - - 15,212 15,212
Average Interest Rate 2.19% 2.19%
--------- -------- -------- -------- -------- -------- -------- --------
Total Interest-Earning Assets $ 204,420 $ 93,907 $ 65,957 $ 48,210 $ 63,380 $196,346 $672,220 $692,848
Average Interest Rate 5.66% 6.32% 6.65% 6.99% 7.21% 6.98% 6.48%
========= ======== ======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
- -----------------------------
NOW $ 65,437 $ - $ - $ - $ - $ 53,182 $118,619 $118,619
Average Interest Rate 1.96% 0.51% 1.31%
Money Market 90,798 - - - - 4,556 95,354 95,354
Average Interest Rate 2.36% 1.24% 2.31%
Savings - - - - - 22,311 22,311 22,311
Average Interest Rate 0.50% 0.50%
CD's Under $100,000 109,390 28,964 25,033 8,537 747 - 172,671 174,134
Average Interest Rate 2.95% 3.89% 4.15% 4.43% 5.11% 3.36%
CD's $100,000 and Over 117,910 21,677 12,916 4,968 2,145 - 159,616 160,705
Average Interest Rate 3.49% 4.15% 4.39% 4.54% 5.27% 3.71%
Securities Sold Under
Repurchase Agreements and
Federal Funds Purchased 14,446 - - - - - 14,446 14,446
Average Interest Rate 0.85% 0.85%
Short Term Borrowings
Average Interest Rate 1,000 - - - - - 1,000 1,000
2.85% 2.85%
Other Borrowings(3) - 1,428 1,428 7,144 - - 10,000 10,000
Average Interest Rate 3.46% 3.46% 3.46% 3.46%
--------- -------- -------- -------- -------- -------- -------- --------
Total Interest-Bearing Liabilities $ 398,981 $ 52,069 $ 39,377 $ 20,649 $ 2,892 $ 80,049 $594,017 $596,569
Average Interest Rate 2.74% 3.99% 4.20% 4.12% 5.23% 0.55% 2.71%
========= ======== ======== ======== ======== ======== ======== ========
- ----------
(1) Securities available for sale are shown at their amortized cost, excluding
market value adjustment for net unrealized gains of $862,000.
(2) Represents interest bearing deposits with Banks, Federal Reserve Bank
Stock, Federal Home Loan Bank Stock and other marketable equity securities.
(3) Other borrowings consists of a term loan maturing June 30, 2006 that bears
interest at 3-month Libor plus 170 basis points. The variable rate is reset
quarterly. The variable interest payments on the term loan are being hedged
through an interest rate swap. Under the interest rate swap, the Company
pays a fixed rate of interest of 6.45% and receives a floating rate of
interest of 3-month Libor plus 170 basis points. Other terms of the swap
mirror those of the term debt.
24
Core deposits, which represent all deposits other than time deposits in
excess of $100,000, averaged 77% of total average deposits in 2002 and 80% in
2001. The Company closely monitors its reliance on time deposits in excess of
$100,000. The Bank does not nor has it ever solicited brokered deposits. Table 4
sets forth the amounts of time deposits with balances of $100,000 or more that
mature within indicated periods.
Table 4: Maturity of Time Deposits of $100,000 or More
December 31, 2002
Amount
------
(thousands)
Three Months or Less $ 34,724
Three Through Six Months 35,910
Six Through Twelve Months 47,276
Over Twelve Months 41,706
----------
Total $ 159,616
==========
Earning Assets
Loans
Lending activities are CNB's single largest source of revenue. Although
management is continually evaluating alternative sources of revenue, lending is
the major segment of the Company's business and is key to profitability. Average
loans for the year ended December 31, 2002 were $553.5 million, or 91% of
average earning assets as compared to $458.0 million, or 91% of average earning
assets for 2001.
The commercial loan portfolio includes commercial, financial and
agricultural loans as well as commercial real estate loans. As of December 31,
2002, the commercial loan portfolio comprised 61% of total loans compared to 55%
in 2001.
As of December 31, 2002 the Company had total gross loans of $605.8
million, compared to $511.6 million at December 31, 2001, an increase of $94.1
million or 18%. The composition of the Company's loan portfolio for the past
five years is presented in Table 5.
Table 5: Loan Portfolio Composition
As of December 31,
Types of Loans 2002 2001 2000 1999 1998
(thousands)
Commercial, Financial and Agricultural $ 366,954 $ 280,453 $ 192,540 $ 136,937 $ 85,208
Real Estate - Construction 52,596 41,064 33,648 18,926 8,527
Real Estate - Mortgage 145,815 147,973 119,701 86,275 72,357
Installment and Consumer 40,420 42,157 33,970 23,946 20,923
----------- ---------- ---------- ---------- ---------
Total Loans, Net of Unearned Discount 605,785 511,647 379,859 266,084 187,015
Less: Allowance for Loan Losses (6,574) (5,205) (3,670) (2,671) (1,875)
----------- ---------- ---------- ---------- ---------
Net Loans $ 599,211 $ 506,442 $ 376,189 $ 263,413 $ 185,140
=========== ========== ========== ========== =========
Table 6 sets forth the maturity distribution for selected components of the
Company's loan portfolio as of December 31, 2002. Demand loans and overdrafts
are reported as due in one year or less, and loan maturity is based upon
scheduled principal payments.
25
Table 6: Maturity Schedule of Selected Loans
December 31, 2002
0-12 1-5 Over 5
Months Years Years Total
------ ----- ----- -----
(thousands)
Commercial, Financial & Agricultural $ 90,062 $ 153,055 $ 123,837 $ 366,954
Real Estate - Construction 16,526 23,923 12,147 52,596
All Other Loans 69,156 74,505 42,574 186,235
---------- ---------- ---------- ---------
Total $ 175,744 $ 251,483 $ 178,558 $ 605,785
========== ========== ========== =========
Fixed Interest Rate $ 112,930 $ 178,994 $ 95,892 $ 387,816
Variable Interest Rate $ 62,814 $ 72,489 $ 82,666 $ 217,969
Loan concentrations are considered to exist where there are amounts loaned
to multiple borrowers engaged in similar activities which collectively would be
similarly impacted by economic or other conditions and when the total of such
amounts exceed 25% of total capital. Due to the lack of diversified industry and
the relative proximity of markets served, the Company has concentrations in
geographic as well as in types of loans funded. At December 31, 2002, the Bank's
four largest concentration categories are: Land Development ($38.7 million),
Commercial Real Estate ($29.9 million), Professional ($27.2 million) and
Commercial Construction ($26.1 million).
Loan Quality
Non-performing assets consist of non-accrual loans, loans past due 90 days
or more and still accruing interest, other real estate owned and repossessions.
Non-performing assets increased from $2.9 million at December 31, 2001 to $8.1
million at December 31, 2002. Non-performing assets as a percentage of total
assets increased to 1.11% in 2002 from 0.47% in 2001. The increase in
non-performing assets was primarily attributed to three separate relationships
totaling approximately $5.0 million. One of the credits is a commercial loan
totaling $623,000 at December 31, 2002. The credit is collateralized by rolling
stock, inventory and storage contracts. The Bank has estimated its loss on this
credit to be approximately $375,000. The other two of the relationships,
totaling $4.4 million at December 31, 2002, are commercial real estate secured
and are collateralized by an apartment complex and a renovated commercial
building. The Bank does not anticipate any significant losses on these two
credits at this time.
Management is continually analyzing its loan portfolio in an effort to
recognize and resolve its problem assets as quickly and efficiently as possible.
Table 7 sets forth certain categories of risk elements on non-performing assets
for the past five years.
Table 7: Non-Performing Assets
December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands)
Non-Accrual Loans $ 5,611 $ 1,377 $ 579 $ 549 $ 1,393
Past Due Loans 90 Days or
More and Still Accruing 2,439 1,271 840 180 22
Other Real Estate Owned &
Repossessions 24 229 56 102 613
-------- -------- -------- -------- --------
Total Non-Performing Assets $ 8,074 $ 2,877 $ 1,475 $ 831 $ 2,028
======== ======== ======== ======== ========
Percent of Total Assets 1.11% 0.47% 0.32% 0.24% 0.65%
======== ======== ======== ======== ========
26
The allowance for loan loss is an amount that management believes will be
adequate to absorb inherent losses on existing loans that may become
uncollectible based on evaluations of the collectibility of the loans. The
allowance for loan loss is established through a provision for loan loss charged
to expense. Loans are charged against the allowance for loan loss when
management believes that the collectibility of the principal is unlikely. The
evaluation of collectibility takes into consideration such objective factors as
changes in the nature and volume of the loan portfolio and historical loss
experience. The evaluation also considers certain subjective factors such as
overall portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay. The determination of
the allowance for loan losses considers both specifically identified impaired
loans, as well as expected losses on large groups of smaller-balance homogeneous