10-Q 1 cnb10q.txt INITIAL FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 --------------------- OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. 0-25988 CNB Florida Bancshares, Inc. ---------------------------- (Exact name of registrant as specified in its charter) FLORIDA 59-2958616 ------------------------------ ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 9715 Gate Parkway North Jacksonville, Florida 32246 --------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (904) 997-8484 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ The number of shares of the registrant's common stock outstanding as of October 31, 2003 was 6,249,740 shares, $0.01 par value per share. CNB FLORIDA BANCSHARES, INC. FINANCIAL REPORT ON FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition ..........................................................3 Consolidated Statements of Income ......................................................................4 Consolidated Statements of Cash Flows ...................................................................6 Notes to Consolidated Financial Statements ..............................................................7 Selected Financial Data ................................................................................11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview ...............................................................................................12 Results of Operations ..................................................................................12 Liquidity and Interest Rate Sensitivity.................................................................18 Earning Assets..........................................................................................21 Funding Sources ........................................................................................25 Capital Resources ......................................................................................25 Critical Accounting Policies............................................................................26 Item 3. Quantitative and Qualitative Disclosure About Market Risk .....................................26 Item 4. Controls and Procedures........................................................................27 PART II - OTHER INFORMATION Item 1. Legal Proceedings .............................................................................28 Item 2. Changes in Securities and Use of Proceeds......................................................28 Item 3. Defaults Upon Senior Securities ...............................................................28 Item 4. Submission of Matters to a Vote of Security Holders ...........................................28 Item 5. Other Information .............................................................................28 Item 6. Exhibits and Reports ..........................................................................28

2 PART I FINANCIAL INFORMATION CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) ASSETS September 30, December 31, 2003 2002 ------------ ------------ Cash and cash equivalents: (thousands) Cash and due from banks $ 20,747 $ 15,986 Federal funds sold 500 5,400 Interest-bearing deposits in other banks 10,487 12,215 --------- --------- Total cash and cash equivalents 31,734 33,601 Investment securities held to maturity (market value of $29,603) 29,693 - Investment securities available for sale 60,895 49,682 Loans: Commercial 111,234 111,033 Commercial real estate 356,839 324,525 Mortgages (including home equity) 149,304 132,513 Consumer 31,325 32,199 Credit card - 1,164 Tax free 5,938 4,351 --------- --------- Total loans, net of unearned income 654,640 605,785 Less: Allowance for loan losses (7,048) (6,574) Net loans 647,592 599,211 --------- --------- Loans held for sale 2,734 10,893 Premises and equipment, net 24,760 25,086 Intangible assets, net 5,512 6,056 Other assets 7,379 6,145 --------- --------- TOTAL ASSETS $ 810,299 $ 730,674 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing demand $ 94,720 $ 80,065 Savings, NOW and money market 288,549 236,284 Time under $100,000 176,861 172,671 Time $100,000 and over 167,673 159,616 --------- --------- Total deposits 727,803 648,636 Securities sold under repurchase agreements and federal funds purchased 11,476 14,446 Other borrowings 11,500 11,000 Other liabilities 5,301 5,671 --------- --------- Total liabilities 756,080 679,753 --------- --------- SHAREHOLDERS' EQUITY Preferred stock; $.01 par value; 500,000 shares authorized, no shares issued or outstanding - - Common stock; $.01 par value; 10,000,000 shares authorized, 6,220,490 shares issued and outstanding at September 30, 2003 and 6,125,500 shares issued and outstanding at December 31, 2002 62 61 Additional paid-in capital 31,802 30,840 Retained earnings 23,193 19,912 Accumulated other comprehensive (loss) income, net of taxes (838) 108 --------- --------- Total shareholders' equity 54,219 50,921 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 810,299 $ 730,674 ========= =========

See accompanying notes to unaudited consolidated financial statements. 3 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, 2003 2002 --------- ---------- (thousands) Interest Income Interest and fees on loans $ 10,101 $ 10,119 Interest on investment securities available for sale 509 552 Interest on investment securities held to maturity 202 24 Interest on federal funds sold 18 11 Interest on interest-bearing deposits 59 10 ---------- ---------- Total interest income 10,889 10,716 Interest Expense Interest on deposits 3,564 3,733 Interest on repurchases and federal funds purchased 23 50 Interest on other borrowings 174 165 ---------- ---------- Total interest expense 3,761 3,948 ---------- ---------- Net interest income 7,128 6,768 Provision for Loan Losses 325 600 ---------- ---------- Net interest income after provision for loan losses 6,803 6,168 Non-Interest Income Service charges 890 823 Secondary market mortgage sales 300 568 Other fees and charges 245 161 Securities gains 11 - ---------- ---------- Total non-interest income 1,446 1,552 Non-Interest Expense Salaries and employee benefits 2,752 2,828 Occupancy and equipment expense 944 882 Other operating expense 1,784 1,645 ---------- ---------- Total non-interest expense 5,480 5,355 ---------- ---------- Income before income taxes 2,769 2,365 Provision for income taxes 1,032 888 ---------- ---------- NET INCOME $ 1,737 $ 1,477 ========== ========== Earnings Per Share (Note 3): Basic earnings per common share $ 0.28 $ 0.24 ========== ========== Weighted average shares outstanding 6,220,490 6,104,021 ========== ========== Diluted earnings per common share $ 0.27 $ 0.24 ========== ========== Diluted weighted average shares outstanding 6,399,338 6,213,422 ========== ========== Dividends Per Share $ 0.06 $ 0.05 ========== ==========

See accompanying notes to unaudited consolidated financial statements. 4 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine Months Ended September 30, 2003 2002 --------- --------- (thousands) Interest Income Interest and fees on loans $ 30,251 $ 29,019 Interest on investment securities available for sale 1,486 1,399 Interest on investment securities held to maturity 202 95 Interest on federal funds sold 87 54 Interest on interest-bearing deposits 305 15 ---------- ---------- Total interest income 32,331 30,582 Interest Expense Interest on deposits 11,290 10,910 Interest on repurchases and federal funds purchased 79 158 Interest on other borrowings 512 489 ---------- ---------- Total interest expense 11,881 11,557 ---------- ---------- Net interest income 20,450 19,025 Provision for Loan Losses 1,650 1,625 ---------- ---------- Net interest income after provision for loan losses 18,800 17,400 Non-Interest Income Service charges 2,657 2,385 Secondary market mortgage sales 1,190 1,562 Other fees and charges 684 505 Securities gains 406 4 ---------- ---------- Total non-interest income 4,937 4,456 Non-Interest Expense Salaries and employee benefits 8,302 8,354 Occupancy and equipment expense 2,727 2,538 Other operating expense 5,285 4,926 ---------- ---------- Total non-interest expense 16,314 15,818 ---------- ---------- Income before income taxes 7,423 6,038 Provision for income taxes 2,716 2,233 ---------- ---------- NET INCOME $ 4,707 $ 3,805 ========== ========== Earnings Per Share (Note 3): Basic earnings per common share $ 0.76 $ 0.62 ========== ========== Weighted average shares outstanding 6,184,962 6,100,368 ========== ========== Diluted earnings per common share $ 0.74 $ 0.61 ========== ========== Diluted weighted average shares outstanding 6,373,149 6,189,081 ========== ========== Dividends Per Share $ 0.17 $ 0.15 ========== ==========

See accompanying notes to unaudited consolidated financial statements. 5 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2003 2002 -------- --------- (thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,707 $ 3,805 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investment securities available for sale (382) - Gain on called investment securities available for sale (24) (4) Gain on sale of credit card portfolio (55) - Depreciation and amortization 1,936 1,864 Provision for loan losses 1,650 1,625 Investment securities amortization, net 457 150 Loss on sale of premises and equipment 63 - Changes in assets and liabilities: Loans held for sale 8,159 3,485 Other assets 431 (1,403) Other liabilities (662) 915 -------- -------- Net cash provided by operating activities 16,280 10,437 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities available for sale (59,177) (32,483) Purchases of investment securities held to maturity (29,850) - Proceeds from maturities of securities available for sale 22,107 5,466 Proceeds from sales of securities available for sale 10,382 - Proceeds from called securities available for sale 14,000 8,140 Proceeds from called securities held to maturity - 2,930 Net increase in loans (51,006) (62,905) Sale of premises and equipment 245 - Purchases of premises and equipment (1,373) (390) -------- -------- Net cash used in investing activities (94,672) (79,242) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 79,166 80,139 Net decrease in securities sold under repurchase agreements and federal funds purchased (2,970) (9,134) Proceeds from other borrowings 500 - Cash dividends (1,052) (915) Repurchase of common stock - (100) Proceeds from exercise of stock options 881 104 -------- -------- Net cash provided by financing activities 76,525 70,094 -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,867) 1,289 CASH AND CASH EQUIVALENTS, beginning of period 33,601 20,677 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 31,734 $ 21,966 ======== ======== SUPPLEMENTAL DISCLOSURES: Interest paid $ 12,056 $ 12,590 ======== ======== Income taxes paid $ 3,014 $ 2,266 ======== ========

See accompanying notes to unaudited consolidated financial statements. 6 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) Note 1. Basis of Presentation and Accounting Policies The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q which do not require all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, such financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. Management's discussion and analysis should be read in conjunction with the consolidated financial statements. Certain amounts and captions relating to 2002 have been reclassified to conform to current year presentation. Accounting policies followed in the presentation of interim financial results are presented in Note 2 of CNB Florida Bancshares, Inc.'s (the "Company's") audited consolidated financial statements included in Form 10-K for the year ended December 31, 2002, which is available on the Company's web site at www.cnbnb.com. Note 2. Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CNB National Bank. All significant intercompany accounts and transactions have been eliminated. Note 3. Earnings Per Share Basic earnings per common share is calculated based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated based on the weighted average number of shares of common stock outstanding and common stock equivalents, consisting of outstanding stock options that have a dilutive effect on earnings per share. Common stock equivalents are determined using the treasury stock method for diluted shares outstanding. The difference between diluted and basic shares outstanding is common stock equivalents from stock options outstanding during the periods ended September 30, 2003 and 2002. The following table sets forth the computation of earnings per share for the each of the three and nine month periods ended September 30, 2003 and 2002. Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Numerator: Net income available to common shareholders $ 1,737 $ 1,477 $ 4,707 $ 3,805 ========== ========== ========== ========== Denominator: Denominator for basic earnings per common share Weighted-average shares 6,220,490 6,104,021 6,184,962 6,100,368 Effect of dilutive securities: Common stock options 178,848 109,401 188,187 88,713 ---------- ---------- ---------- ---------- Dilutive potential common shares 178,848 109,401 188,187 88,713 ---------- ---------- ---------- ---------- Denominator for diluted earnings per common share Adjusted weighted average shares 6,399,338 6,213,422 6,373,149 6,189,081 ========== ========== ========== ========== Basic earnings per common share $ 0.28 $ 0.24 $ 0.76 $ 0.62 ========== ========== ========== ========== Diluted earnings per common share $ 0.27 $ 0.24 $ 0.74 $ 0.61 ========== ========== ========== ==========

Note 4. Comprehensive Income Comprehensive income is defined as the change in equity during a period arising from non-owner transactions and events. The following table details the Company's comprehensive income for the three and nine months ending September 30, 2003 and 2002. 7 Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Unrealized (loss) gain recognized in other comprehensive income (net): Available for sale securities $(1,279) $ 385 $(1,581) $ 545 Interest rate swap designated as cash flow hedge 131 (450) 63 (676) ------- ------- ------- ------- Total unrealized (loss) gain before income taxes (1,148) (65) (1,518) (131) Deferred income taxes 425 24 562 49 ------- ------- ------- ------- Net of deferred income tax $ (723) $ (41) $ (956) $ (82) ======= ======= ======= ======= Amounts reported in net income: Securities gains $ 11 $ 4 $ 406 $ 4 Interest rate swap designated as cash flow hedge (93) (74) (264) (214) Net amortization (accretion) 195 59 457 150 ------- ------- ------- ------- Reclassification adjustment 113 (11) 599 (60) Deferred income taxes (42) 4 (222) 22 ------- ------- ------- ------- Reclassification adjustment, net of deferred income tax $ 71 $ (7) $ 377 $ (38) ======= ======= ======= ======= Amounts reported in other comprehensive income: Net unrealized (loss) gain arising during period, net of tax $ (652) $ (48) $ (579) $ (120) Reclassification adjustment, net of tax (71) 7 (377) 38 ------- ------- ------- ------- Unrealized (loss) gain arising during period, net of tax (723) (41) (956) (82) Net income 1,737 1,477 4,707 3,805 ------- ------- ------- ------- Total comprehensive income $ 1,014 $ 1,436 $ 3,751 $ 3,723 ======= ======= ======= =======

Note 5. Stock-Based Compensation The Company has long-term incentive plans that provide stock-based awards, including stock options to certain key employees. The Company applies the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option and award plans and has adopted the disclosure-only option under Statement of Financial Accounting Standards, ("SFAS") No. 123, Accounting for Stock-Based Compensation. If the Company had adopted the accounting provisions of SFAS 123 and recognized expense for the fair value of employee stock options granted over the vesting life of the options, pro forma stock-based compensation expense (net of tax) for the three and nine months ended September 30, 2003 would have been $46,000 and $158,000, respectively. Pro forma stock-based compensation expense (net of tax) for the three and nine months ended September 30, 2002 would have been $55,000 and $220,000, respectively. The following table outlines pro forma net income and earnings per share that would have been reported if the Company had adopted the fair value provisions of SFAS 123 (dollars in thousands, except per share data): For the Nine Months Ended --------------------------------------------------------------- As Reported Pro Forma ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income $ 4,707 $ 3,805 $ 4,549 $ 3,585 Basic earnings per common share $ 0.76 $ 0.62 $ 0.74 $ 0.59 Diluted earnings per common share $ 0.74 $ 0.61 $ 0.71 $ 0.58

8 For the Three Months Ended --------------------------------------------------------------- As Reported Pro Forma ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income ............................. $1,737 $1,477 $1,691 $1,422 Basic earnings per common share ........ $ 0.28 $ 0.24 $ 0.27 $ 0.23 Diluted earnings per common share ...... $ 0.27 $ 0.24 $ 0.26 $ 0.23

In determining the pro forma disclosures above, the fair value of options granted was estimated on the grant date using the Black-Scholes option-pricing model. The Black-Scholes model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. Options to purchase 91,500 shares of stock with an estimated average fair value of $4.50 per option were granted during the nine months ended September 30, 2003. Options to purchase 112,000 shares with an estimated average fair value of $4.12 per option were granted during the nine months ended September 30, 2002. The weighted-average grant date fair values of options granted during 2003 and 2002 were based on the following assumptions: 2003 2002 ---- ---- Risk-free interest rate ............ 2.49% 5.13% Dividend yield ..................... 1.54% 1.88% Volatility ......................... 37.00% 38.00% Expected lives ..................... 6 years 6 years Compensation expense under the fair value-based method is recognized over the vesting period of the related stock options and is based on the estimated number of shares expected to actually vest. Accordingly, the pro forma results of applying SFAS 123 in 2003 and 2002 may not be indicative of future amounts. Note 6. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted the provisions of this Statement on January 1, 2003, which did not have a significant impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, Amendments of SFAS 13, and Technical Corrections as of May 2002 ("SFAS 145"). SFAS 145 rescinds SFAS 4, Extinguishments of Debt Made to Satisfy Sinking-Funds Requirements. SFAS 145 also rescinds FAS 44, Accounting for Intangible Assets of Motor Carriers and amends FAS 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of this Statement were adopted by the Company on January 1, 2003, which did not have a significant impact on the Company's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The provisions of this Statement were adopted by the Company on January 1, 2003, which did not have a significant impact on the Company's consolidated financial statements. 9 In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable-Interest Entities - an Interpretation of ARB No. 51 ("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity and (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: o The direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights o The obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities o The right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a significant impact on the Company's consolidated financial statements. In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The provisions of this Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, the provisions of SFAS 149 which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"). This Statement establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that financial instruments within its scope be classified as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company's consolidated financial statements. In October 2003, the FASB issued FASB Staff Position No. FIN 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This Staff Position defers the effective date for applying the provisions of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003 and non-registered investment companies. This adoption of this Staff Position is not expected to have a material impact on the Company's consolidated financial statements. 10 CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY Selected Financial Data Nine Months Ended September 30, Dollars in thousands except per share information. 2003 2002 ==================================================================================================================================== SUMMARY OF OPERATIONS: Total interest income $ 32,331 $ 30,582 Total interest expense (11,881) (11,557) ----------- ----------- Net interest income 20,450 19,025 Provision for loan losses (1,650) (1,625) ----------- ----------- Net interest income after provision for loan losses 18,800 17,400 Non-interest income 4,937 4,456 Non-interest expense (16,314) (15,818) ----------- ----------- Income before taxes 7,423 6,038 Income taxes (2,716) (2,233) ----------- ----------- Net income $ 4,707 $ 3,805 ----------- ----------- ==================================================================================================================================== PER COMMON SHARE: Basic earnings $ 0.76 $ 0.62 Diluted earnings 0.74 0.61 Book value 8.72 8.12 Dividends declared 0.18 0.15 Actual shares outstanding 6,220,490 6,106,703 Weighted average shares outstanding 6,184,962 6,100,368 Diluted weighted average shares outstanding 6,373,149 6,189,081 ==================================================================================================================================== KEY RATIOS: Return on average assets 0.81% 0.79% Return on average shareholders' equity 11.90 10.54 Dividend payout 23.68 24.19 Efficiency ratio 64.26 67.37 Total risk-based capital ratio 8.81 8.69 Average shareholders' equity to average assets 6.80 7.49 Tier 1 leverage 7.72 6.42 ==================================================================================================================================== FINANCIAL CONDITION AT PERIOD-END: Assets $ 810,299 $ 686,860 Loans 654,640 573,767 Deposits 727,803 613,030 Shareholders' equity 54,219 49,587 ====================================================================================================================================

11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following analysis reviews important factors affecting the financial condition and results of operations of CNB Florida Bancshares, Inc. for the three and nine months ended September 30, 2003 and 2002. This financial information should be read in conjunction with the unaudited consolidated financial statements of CNB Florida Bancshares, Inc. ("the Company") and its wholly owned subsidiary, CNB National Bank ("the Bank"), included in "Item 1. Financial Statements" above and the audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 2002. The Company makes its Securities and Exchange Commission filings available on its website at www.cnbnb.com. The analysis contains forward-looking statements with respect to financial and business matters, which are subject to risks and uncertainties that may change over a period of time. These risks and uncertainties include but are not limited to changes in the interest rate environment that may reduce margins, general economic or business conditions in the Company's markets that lead to a deterioration in credit quality or reduced loan demand, legislative or regulatory changes and competitors of the Company that may have greater financial resources and develop products or services that enable such competitors to compete more successfully than the Company. Other factors that may cause actual results to differ from the forward-looking statements include customer acceptance of new products and services, changes in customer spending and saving habits and the Company's success in managing costs associated with expansion. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Actual results could be significantly different from the forward-looking statements contained herein. The Company has no foreign operations; accordingly, there are no assets or liabilities attributable to foreign operations. RESULTS OF OPERATIONS The Company's earnings for the three month period ended September 30, 2003 were $1.7 million, or $0.27 per diluted share, compared to $1.5 million, or $0.24 per diluted share, in the third quarter of 2002. For the nine months ended September 30, 2003, net income was $4.7 million or $0.74 per diluted share, compared to $3.8 million, or $0.61 per diluted share for the comparable 2002 period. Total assets increased to $810.3 million at September 30, 2003 compared to $730.7 million at December 31, 2002 and $686.9 million at September 30, 2002. Total outstanding loans and deposits rose 14% and 19% to $654.6 million and $727.8 million, respectively, at September 30, 2003 from $573.8 million and $613.0 million, respectively, at September 30, 2002. Net Interest Income Net interest income is the single largest source of revenue for the Bank and consists of interest and net loan fee income generated by earning assets, less interest expense paid on interest bearing liabilities. The Company's primary objective is to manage its assets and liabilities to provide the largest possible amount of income while balancing interest rate, credit quality, liquidity and capital risks. Net interest income was $20.5 million for the nine month period ended September 30, 2003, compared to $19.0 million for the comparable period in 2002, an increase of 7%. Interest income increased 2% while interest expense decreased 5% for the 2003 third quarter over comparable 2002 amounts. The increase in net interest income reflects growth in loans, investments and non-interest bearing deposits, which were partially offset by growth in time deposits and declining rates and spreads. Total average earning assets increased $135.4 million, or 23% to $725.8 million in 2003, compared to $590.5 million in 2002. The increase was primarily due to growth in the average balance of loans and investment securities available for sale to $619.7 million and $56.9 million at September 30, 2003 from $540.5 million and $42.5 million for the same period in 2002, respectively. Increases in time, money market and other interest bearing deposits, were the main contributors in the $114.9 million, or 22% growth in average interest bearing liabilities. Net interest margin was 3.79% in the third quarter 2003 compared to 4.30% in the third quarter 2002 and 3.76% in the second quarter 2003. Total earning asset yields for the first nine months in 2003 decreased to 5.96% from 6.92% in 2002 and rates on interest-bearing liabilities decreased to 2.53% in 2003 from 3.01% in 2002. The decline in net interest margin reflects spread tightening as a result of declining loan yields and an increase in lower yielding, short-term investments. The Company continues to maintain an asset sensitive position with respect to net interest income. Maintaining this profile will allow the Company to take advantage of a rising rate environment. 12 Tables 1 and 2 provide the Company's average volume of interest earning assets and interest bearing liabilities for the nine and three months ended September 30, 2003 and 2002, respectively. Table 1: Year to Date Average Balances - Yields and Rates Nine Months Ended Nine Months Ended September 30, 2003 September 30, 2002 ----------------------------------- --------------------------------- Interest Interest Average Income or Average Average Income or Average Balance Expense Rate Balance Expense Rate ---------- ---------- -------- --------- --------- -------- (dollars in thousands) ASSETS: Federal funds sold $ 10,634 $ 87 1.09% $ 4,337 $ 54 1.66% Investment securities available for sale 56,894 1,486 3.49 42,500 1,399 4.40 Investment securities held to maturity 5,351 202 5.05 2,113 95 6.01 Loans (1) 619,712 30,251 6.53 540,500 29,019 7.18 Interest bearing deposits 33,231 305 1.23 1,021 15 1.96 ---------- ---------- -------- --------- --------- -------- TOTAL EARNING ASSETS 725,822 32,331 5.96 590,471 30,582 6.92 All other assets 52,288 54,372 ---------- --------- TOTAL ASSETS $ 778,110 $ 644,843 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY: NOW and money markets $ 233,882 $ 2,691 1.54% $ 186,829 $ 2,504 1.79% Savings 24,065 80 0.44 21,795 122 0.75 Time deposits 347,005 8,519 3.28 280,672 8,284 3.95 Repurchases and federal funds purchased 12,135 79 0.87 13,964 158 1.51 Short term borrowings 1,115 23 2.76 - - - Other borrowings (2) 10,000 489 6.54 10,000 489 6.54 ---------- --------- -------- --------- --------- -------- TOTAL INTEREST BEARING LIABILITIES 628,202 11,881 2.53 513,260 11,557 3.01 Demand deposits 90,970 78,181 Other liabilities 6,032 5,117 Shareholders' equity 52,906 48,285 ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 778,110 $ 644,843 ========== ========= -------- -------- INTEREST SPREAD (3) 3.43% 3.91% ======== ======== ---------- --------- NET INTEREST INCOME $ 20,450 $ 19,025 ========== ========= NET INTEREST MARGIN (4) 3.77% 4.31% ======== ========= ------------ (1) Interest income on average loans includes loan fee recognition of $396,000 and $380,000 in 2003 and 2002, respectively. (2) Interest expense and average rate amounts include the impact of the Company's $10 million pay-fixed interest rate swap that is accounted for as a cash flow hedge of other borrowings. (3) Represents the average rate earned minus average rate paid. (4) Represents net interest income divided by total earning assets.

13 Table 1a: Analysis of Year to Date Changes in Interest Income and Expense NET CHANGE SEPTEMBER 30, NET CHANGE SEPTEMBER 30, 2002-2003 ATTRIBUTABLE TO: 2001-2002 ATTRIBUTABLE TO: -------------------------- -------------------------- Net Net Volume (1) Rate (2) Change Volume (1) Rate (2) Change ---------- -------- ------ ---------- -------- ------ (thousands) INTEREST INCOME: Federal funds sold $ 78 $ (45) $ 33 $ 34 $ (74) $ (40) Investment securities available for sale 474 (387) 87 457 (497) (40) Investment securities held to maturity 146 (39) 107 (208) (2) (210) Loans 4,254 (3,022) 1,232 6,378 (5,708) 670 Interest bearing deposits 472 (182) 290 16 (9) 7 ------- ------- ------- ------- ------- ------- Total 5,424 (3,675) 1,749 6,677 (6,290) 387 ------- ------- ------- ------- ------- ------- INTEREST EXPENSE: NOW and money markets 630 (443) 187 1,004 (1,518) (514) Savings 13 (55) (42) 31 (67) (36) Time deposits 1,960 (1,725) 235 2,560 (4,538) (1,978) Repurchases and federal funds purchased (21) (58) (79) (9) (313) (322) Short term borrowings 23 - 23 - - - Other borrowings - - - (726) 73 (653) ------- ------- ------- ------- ------- ------- Total 2,605 (2,281) 324 2,860 (6,363) (3,503) ------- ------- ------- ------- ------- ------- Net interest income $ 2,819 $(1,394) $ 1,425 $ 3,817 $ 73 $ 3,890 ======= ======= ======= ======= ======= ======= ----------- (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.

14 Table 2: Quarterly Average Balances - Yields and Rates Three Months Ended Three Months Ended September 30, 2003 September 30, 2002 ---------------------------------- ----------------------------------- Interest Interest Average Income or Average Average Income or Average Balance Expense Rate Balance Expense Rate ---------- ---------- ------ --------- ---------- ------ (dollars in thousands) ASSETS: Federal funds sold $ 7,745 $ 18 0.92% $ 2,572 $ 11 1.70% Investment securities available for sale 63,960 509 3.16 51,388 552 4.26 Investment securities held to maturity 15,878 202 5.05 1,620 24 5.88 Loans (1) 635,170 10,101 6.31 566,236 10,119 7.09 Interest bearing deposits 23,443 59 1.00 1,942 10 2.04 ---------- ---------- ------ --------- ---------- ------ TOTAL EARNING ASSETS 746,196 10,889 5.79 623,758 10,716 6.82 All other assets 50,356 53,927 ---------- --------- TOTAL ASSETS $ 796,552 $ 677,685 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY: NOW and money markets $ 247,017 $ 849 1.36% $ 200,605 $ 924 1.83% Savings 24,926 22 0.35 22,323 42 0.75 Time deposits 346,420 2,693 3.08 297,245 2,767 3.69 Repurchases and federal funds purchased 12,428 23 0.73 12,803 50 1.55 Short term borrowings 1,342 9 2.66 - - - Other borrowings (2) 10,000 165 6.55 10,000 165 6.55 ---------- ---------- ------ --------- ---------- ------ TOTAL INTEREST BEARING LIABILITIES 642,133 3,761 2.32 542,976 3,948 2.88 Demand deposits 94,566 80,029 Other liabilities 5,991 5,389 Shareholders' equity 53,862 49,291 ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 796,552 $ 677,685 ========== ========= ------ ------ INTEREST SPREAD (3) 3.47% 3.94% ====== ====== ---------- ---------- NET INTEREST INCOME $ 7,128 $ 6,768 ========== ========== NET INTEREST MARGIN (4) 3.79% 4.30% ====== ====== --------------- (1) Interest income on average loans includes loan fee recognition of $114,000 and $146,000 in 2003 and 2002, respectively. (2) Interest expense and average rate amounts include the impact of the Company's $10 million pay-fixed interest rate swap that is accounted for as a cash flow hedge of other borrowings. (3) Represents the average rate earned minus average rate paid. (4) Represents net interest income divided by total earning assets.

15 Table 2a: Analysis of Quarterly Changes in Interest Income and Expense NET CHANGE SEPTEMBER 30, NET CHANGE SEPTEMBER 30, 2002-2003 ATTRIBUTABLE TO: 2001-2002 ATTRIBUTABLE TO: -------------------------- -------------------------- Net Net Volume (1) Rate (2) Change Volume (1) Rate (2) Change --------- ---------- --------- ---------- --------- --------- (thousands) INTEREST INCOME: Federal funds sold $ 22 $ (15) $ 7 $ (43) $ (12) $ (55) Investment securities available for sale 135 (178) (43) 252 (160) 92 Investment securities held to maturity 211 (33) 178 (66) - (66) Loans 1,232 (1,250) (18) 1,688 (1,471) 217 Interest bearing deposits 111 (62) 49 13 (9) 4 -------- -------- -------- -------- -------- -------- Total 1,711 (1,538) 173 1,844 (1,652) 192 -------- -------- -------- -------- -------- -------- INTEREST EXPENSE: NOW and money markets 214 (289) (75) 253 (407) (154) Savings 5 (25) (20) 7 (14) (7) Time deposits 457 (531) (74) 596 (1,497) (901) Repurchases and federal funds purchased (2) (25) (27) (13) (58) (71) Short term borrowings 9 - 9 (210) - (210) Other borrowings - - - 64 35 99 -------- -------- -------- -------- -------- -------- Total 683 (870) (187) 697 (1,941) (1,244) -------- -------- -------- -------- -------- -------- Net interest income $ 1,028 $ (668) $ 360 $ 1,147 $ 289 $ 1,436 ======== ======== ======== ======== ======== ======== ----------- (1) The volume variance reflects the change in the average balance outstanding multiplied by the actual average rate during the prior period. (2) The rate variance reflects the change in the actual average rate multiplied by the average balance outstanding during the prior period. Changes which are not solely due to volume changes or solely due to rate changes have been attributed to rate changes.

Non-Interest Income Non-interest income for the three months ended September 30, 2003 decreased $106,000, or 7% compared to the comparable period in 2002. The decrease was primarily attributed to the lower level of secondary market mortgage income due to a temporary reduction in loan production staff resulting from organizational changes within the mortgage function and a decline in mortgage production volume resulting from a general increase in mortgage rates during the third quarter. Non-interest income for the nine months ended September 30, 2003 increased $481,000, or 11%, compared to the nine months ended September 30, 2002. The increase was attributed to a $382,000 gain on the sale of investment securities during the 2003 second quarter. The securities sold were short dated, callable agency debt instruments with premiums resulting from continued interest rate declines and were sold as a partial hedge of the continued margin compression. Other changes in non-interest income for the three and nine month periods include increases in deposit service charges of $67,000 and $272,000, respectively, and a $55,000 gain on the sale of the Company's credit card portfolio during the third quarter of 2003. These increases were partially offset by declines in secondary market mortgage fees of $268,000 and $372,000 for three and nine month periods ended September 30, 2003 compared to comparable periods in 2002. Other fee income, which includes credit card fees, credit life insurance income, safe deposit box fees, discount brokerage fees and other miscellaneous fees, increased $84,000 and $179,000 for the three and nine month periods ended September 30, 2003 compared to the corresponding 2002 periods. Non-interest income, annualized, as a percentage of average assets was 0.85% for the nine months ended September 30, 2003, compared to 0.92% for the comparable period in 2002. 16 Non-Interest Expense Non-interest expense was $5.5 million and $16.3 million for the three and nine month periods ended September 30, 2003 compared to $5.4 million and $15.8 million for the respective 2002 periods, an increase of 2% and 3%, respectively. This increase is primarily attributable to nominal increases in occupancy, equipment and data processing expenses. Annualized, non-interest expense as a percentage of average assets was 2.8% for the first nine months of 2003, compared to 3.3% for the 2002 comparable period, reflecting the Company's continued focus on overhead expense management. Salaries and employee benefits decreased $52,000 or 1% to $8.3 million for the nine months ended September 30, 2003, compared to $8.4 million for the same period in 2002. As a percentage of average assets annualized, salaries and employee benefits decreased to 1.4% from 1.7%, for the first nine months of 2003 and 2002, respectively. Average full-time equivalent employees increased by nine from September 30, 2002 to September 30, 2003. Occupancy expense (including premises, furniture, fixtures and equipment) increased in the three and nine month periods of 2003 by $62,000, or 7% and $189,000, or 7%, respectively, over the comparable periods in 2002. The increase is primarily attributable to an increase in property taxes, building and data processing depreciation expenses and the opening of one branch in Gainesville. These expenses are expected to increase as the Company adds one additional branch over the remainder of 2003. During the third quarter, the Company opened its third Alachua County branch in the Magnolia Parke section of Gainesville. The Company also anticipates opening its new Glen St. Mary branch in Baker County during the fourth quarter of this year. Other operating expenses increased $359,000, or 7%, in the first nine months of 2003 compared to the same period in 2002. The following table details the areas of significance in other operating expenses. The increase in data processing fees is due to higher core processing expenses associated with higher transaction volumes and costs associated with information technology enhancements implemented during the year. Loan expenses increased as a result of the increase in non-performing loans in the fourth quarter of 2002. The increase in other expenses was due to a $63,000 loss on the sale of certain excess bank real estate during the second quarter. Table 3: Other Operating Expenses Nine Months Ended September 30, 2003 2002 ------------ ----------- (thousands) Data processing $1,111 $ 990 Communications 591 572 Legal and professional 579 544 Postage and delivery 557 532 Amortization of intangible assets 545 561 Advertising and promotion 391 361 Supplies 294 320 Regulatory fees 203 177 Loan expenses 201 130 Administrative 110 124 Other general operating 90 79 Education expense 82 96 Insurance and bonding 77 56 Directors fees 73 65 Dues and subscriptions 70 70 Other 311 249 ------ ------ Total other operating expenses $5,285 $4,926 ====== ====== Income Taxes The Company's income tax expense in interim reporting periods is determined by estimating the combined federal and state effective tax rate for the year and applying such rate to interim pre-tax income. The Company's estimated annual effective tax rate for 2003 is approximately 36.5%. 17 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 $125.8 million and represented 18% of average total deposits during the first nine months of 2003, compared to $65.1 million and 11% for 2002. Average loans were 89% and 95% of average deposits for the nine-month periods ended September 30, 2003 and 2002, respectively. In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities such as the collection of interest and fees, federal funds sold, loan and investment maturities and lines for the purchase of federal funds by the Bank 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, 2004 with interest floating quarterly at 3-month Libor plus 145 basis points; and (2) a $10 million term loan maturing October 3, 2006 with interest floating quarterly at 3-month Libor plus 170 basis points. Semi-annual principal payments of approximately $714,000 begin in 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 September 30, 2003 was approximately ($628,000). There was $1.5 million outstanding on the $3 million line of credit on September 30, 2003. The term loan, line of credit and interest rate swap are all collateralized by 100% of the common stock of the Bank. In connection with the term loan and line of credit agreement, the Company is required to maintain compliance with certain covenants and restrictions. The following financial covenants are to be maintained on a quarterly basis and are calculated at the Bank-level: o Interest coverage ratio of greater than or equal to 2.00x through September 30, 2003. o Debt service coverage ratio of greater than or equal to 0.85x through September 30, 2002; 1.00x from October 1, 2002 through September 30, 2003; 1.25x from October 1, 2003 through September 30, 2004; and 1.50x from October 1, 2004 through maturity. o Ratio of non-performing assets to total loans plus other real estate owned and repossessed assets of less than or equal to 1.25%. o Maintenance of tier 1 and total risk based capital ratios that meet the benchmarks for consideration as a "well-capitalized" institution (currently 6% and 10%, respectively). Also, maintenance of a leverage capital ratio of at least 6%. In addition, the Company is subject to the following restrictions: o No additional debt is permitted without consent of the lender. o No increases in dividends paid by the Company to its common shareholders are permitted without consent of the lender. Failure to maintain any of these covenants would place the Company in default of the line of credit agreement. In such a case, absent any waivers obtained from the lender, all amounts payable could be accelerated and become 18 due immediately. As of September 30, 2003, the Company was in compliance with all covenants. Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments that are approaching maturity. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risk to the Company. The Company's liquidity position increased during the first nine months of 2003 as compared to the first nine months of 2002 as average loan balances increased $79.2 million while deposit growth increased $128.4 million. Excess funds were deployed in investment securities, interest bearing deposits with banks and federal funds sold. The Company continues to maintain an asset sensitive position with respect to net interest income. The Company currently anticipates that market interest rates will remain at current low levels into 2004 with increases then expected to be slow and protracted. The Company's gap and liquidity positions are reviewed on a regular basis by management to determine whether or not changes in policies and procedures are necessary to achieve financial goals. This analysis includes assumptions about balance sheet growth and related mix as well as pricing and maturity profile. Included in the review is an internal analysis of the possible impact on net interest income due to market changes in interest rates. Based on this internal analysis, at September 30, 2003, a gradual increase in interest rates of 200 basis points would have increased net interest income over the ensuing twelve-month period by 6.57% as compared to a projection under stable rates. A gradual decrease in interest rates of 200 basis points over this same period would have decreased net interest income by 5.47% as compared to a stable rate environment. At September 30, 2003, the Bank's net economic value ratio was 8.93% and 9.43%, assuming a gradual increase or decrease, respectively, in interest rates of 200 basis points over a 12-month period. The net economic value ratio is the market value of equity divided by the market value of assets and measures the Bank's capitalization, talking into account balance sheet gains and losses. The net economic value ratio, however, does not place a value on the Company's core deposit relationships. The computations of interest rate risk do not necessarily include certain actions that management may undertake to manage this risk in response to anticipated changes in interest rates. Table 4, "Rate Sensitivity Analysis", presents rate sensitive assets and liabilities, separating the assets and liabilities into fixed and variable interest rate categories. The estimated fair value of each instrument category is also shown in the table. While these fair values are based on management's judgment of the most appropriate factors, there is no assurance that, were the Company to have disposed of such instruments at September 30, 2003, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. 19 Table 4: Rate Sensitivity Analysis September 30, 2003 (dollars in thousands) Fair 1 Year 2 Years 3 Years 4 Years 5 Years Beyond TOTAL Value --------- --------- --------- --------- --------- --------- --------- --------- INTEREST-EARNING ASSETS: ------------------------ Gross Loans Fixed rate loans $ 127,846 $ 57,041 $ 42,885 $ 48,982 $ 50,886 $ 124,357 $ 451,997 $ 460,974 Average interest rate 6.24% 6.78% 6.83% 6.87% 6.43% 6.07% 6.41% Variable rate loans 56,034 25,344 25,284 9,539 11,178 75,264 202,643 207,057 Average interest rate 4.43% 4.64% 4.76% 5.94% 6.04% 6.84% 5.55% Investment securities (1) Fixed rate investments 4,023 - - 5,510 - 78,311 87,844 87,026 Average interest rate 1.22% 2.15% 4.34% 4.06% Variable rate investments - - - - - 344 344 353 Average interest rate 4.06% 4.06% Federal funds sold 500 - - - - - 500 500 Average interest rate 0.90% 0.90% Other earning assets (2) 13,606 - - - - - 13,606 13,606 Average interest rate 1.87% 1.87% --------- --------- --------- --------- --------- --------- --------- --------- Total interest-earning assets $ 202,009 $ 82,385 $ 68,169 $ 64,031 $ 62,064 $ 278,276 $ 756,934 $ 769,516 Average interest rate 5.33% 6.12% 6.06% 6.33% 6.36% 5.79% 5.82% ========= ========= ========= ========= ========= ========= ========= ========= INTEREST-BEARING LIABILITIES: ----------------------------- NOW $ 66,764 $ - $ - $ - $ - $ 65,914 $ 132,678 $ 132,678 Average interest rate 1.50% 0.21% 0.86% Money market 125,917 - - - - 4,553 130,470 130,470 Average interest rate 1.97% 1.08% 1.94% Savings - - - - - 25,401 25,401 25,401 Average interest rate 0.35% 0.35% CD's under $100,000 114,712 36,222 19,031 6,343 553 - 176,861 178,467 Average interest rate 2.38% 3.77% 3.89% 3.76% 4.08% 2.88% CD's $100,000 and over 116,355 30,323 11,553 7,746 1,696 - 167,673 169,536 Average interest rate 2.77% 3.75% 3.87% 4.20% 4.72% 3.11% Securities sold under repurchase agreements and federal funds purchased 11,476 - - - - - 11,476 11,476 Average interest rate 0.72% 0.72% Short-term borrowings 1,500 - - - - - 1,500 1,500 Average interest rate 2.58% 2.58% Other borrowings (3) 714 1,428 7,858 - - - 10,000 10,000 Average interest rate 3.64% 3.64% 3.64% 3.64% --------- --------- --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities $ 437,438 $ 67,973 $ 38,442 $ 14,089 $ 2,249 $ 95,868 $ 656,059 $ 659,528 Average interest rate 2.19% 3.76% 3.83% 4.00% 4.56% 0.29% 2.22% ========= ========= ========= ========= ========= ========= ========= ========= ------------- (1) Securities available for sale are shown at their amortized cost, excluding market value adjustment for net unrealized losses of ($719,000). (2) Represents interest bearing deposits with Banks, Federal Reserve Bank Stock, Federal Home Loan Bank Stock and other marketable equity securities. (3) Other borrowings consists of a term loan maturing October 3, 2006 that bears interest at 3-month Libor plus 170 basis points. The variable rate is reset quarterly. The variable interest payments on the term loan are being hedged through an interest rate swap. Under the interest rate swap, the Company pays a fixed rate of interest of 6.45% and receives a floating rate of interest of 3-month Libor plus 170 basis points. Other terms of the swap mirror those of the term debt.

20 Core deposits, which represent all deposits other than time deposits in excess of $100,000, were 77% of total deposits at September 30, 2003, up slightly from 75% at December 31, 2002. The Bank closely monitors its reliance on time deposits in excess of $100,000, which are generally considered less stable and less reliable than core deposits. Table 5, below, sets forth the amounts of time deposits with balances of $100,000 or more that mature within indicated periods. The Bank does not, nor has it ever, solicited brokered deposits. Essentially all of the time deposits with balances of $100,000 or more are from customers in the Bank's primary markets. Table 5: Maturity of Time Deposits of $100,000 or More September 30, 2003 (dollars in thousands) Amount ------ Three months or less $ 33,600 Three through six months 29,265 Six through twelve months 53,490 Over twelve months 51,318 --------- Total $ 167,673 ========= EARNING ASSETS Loans Lending activities are the Company's single largest source of revenue. Although management is continually evaluating alternative sources of revenue, lending is the major segment of the Company's business and is key to profitability. For the first nine months of 2003, average loans were $619.7 million and were 89% of average deposits, compared to $540.5 million and 95% for the same period in 2002. During the third quarter 2003, the Company sold its credit card portfolio to another financial institution. The Company sold accounts with an outstanding balance of $976,000 for proceeds, net of transaction costs, of $1,031,000. In addition to the sale, the Company also entered into a credit card marketing arrangement with the same financial institution. Under the marketing agreement, the Company will offer credit card products issued through the other financial institution. The cards will display the CNB logo and the Company will receive a fee for each account opened, along with a share of interchange income. The card balances will be retained by the other institution. The following table reflects the composition of the Company's loan portfolio as of September 30, 2003 compared to December 31, 2002. Table 6: Loan Portfolio Composition September 30, December 31, 2003 2002 ------------ ----------- (thousands) Commercial $ 111,234 $ 111,033 Commercial real estate 356,839 324,525 Mortgages (including home equity) 149,304 132,513 Consumer 31,325 32,199 Credit card - 1,164 Tax free 5,938 4,351 --------- --------- Total loans, net of unearned income 654,640 605,785 Less: allowance for loan losses (7,048) (6,574) --------- --------- Net loans $ 647,592 $ 599,211 ========= ========= Loan concentrations are considered to exist where there are amounts loaned to multiple borrowers engaged in similar activities which collectively would be similarly impacted by economic or other conditions and when the total of such amounts exceeds 25% of total capital. Due to the lack of diversified industry and the relative proximity of markets served, the Company has concentrations of loans from the North Florida region as well as the types of loans funded. The Bank's four largest concentration categories are: Land Development ($34.5 million), Professional ($32.4 million), Commercial Real Estate ($29.2 million) and Commercial Construction ($25.8 million). 21 Loan Quality The allowance for loan loss is established through a provision for loan loss charged to expense. Loans are charged against the allowance for loan loss when management believes that the collectibility of the principal is unlikely. The allowance for loan loss is an amount that management believes will be adequate to absorb inherent losses on existing loans that are probable of becoming uncollectible based on evaluations of the collectibility of the loans. The evaluations take into consideration such objective factors as changes in the nature and volume of the loan portfolio and historical loss experience. The evaluation also considers certain subjective factors such as overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers' ability to pay. The level of the allowance for loan loss is also impacted by increases and decreases in loans outstanding, because either more or less allowance is required as the amount of the Company's credit exposure changes. To the extent actual loan losses differ materially from management's estimate of these subjective factors, loan growth/run-off accelerates or the mix of loan types changes, the level of the provision for loan loss, and related allowance, can and will fluctuate. The allowance for loan losses on September 30, 2003, was 1.08% of total loans, compared to 1.09% at December 31, 2002 and 1.05% at September 30, 2002. Table 7: "Allocation of Allowance for Loan Losses", set forth below, indicates the specific reserves allocated by loan type. Table 7: Allocation of Allowance for Loan Losses September 30, December 31, 2003 2002 ------------------------ -------------------------- Percent of Percent of Loans in Each Loans in Each Category to Category to Amount Total Loans Amount Total Loans -------- ------------- -------- --------------- (dollars in thousands) Commercial $2,235 17.0 % $1,991 18.3% Commercial real estate 3,358 54.5 3,180 53.6 Mortgages (including home equity) 663 22.8 495 21.9 Consumer 753 4.8 802 5.3 Credit card - - 106 0.2 Tax free - 0.9 - 0.7 Unallocated 39 - - - ------ ----- ------ ----- Total $7,048 100.0% $6,574 100.0% ====== ===== ====== =====

Non-performing assets consist of non-accrual loans, loans past due 90 days or more and still accruing interest, other real estate owned and repossessions. Non-performing assets decreased 47% from December 31, 2002 to $4.3 million at September 30, 2003. Non-performing assets as a percentage of total assets decreased to 0.53% on September 30, 2003 from 1.11% on December 31, 2002. The decline was primarily the result of the placement of a single commercial real estate loan back into performing status during the third quarter 2003. The loan was placed back on performing status due to favorable resolution of certain outstanding issues and an adequate demonstration of repayment. Table 8: Non-Performing Assets September 30, December 31, 2003 2002 ------ ------- (dollars in thousands) Non-accrual loans $3,876 $5,611 Past due loans 90 days or more and still accruing 236 2,439 Other real estate owned and repossessions 161 24 ------ ------ Total non-performing assets $4,273 $8,074 ====== ====== Percent of total assets 0.53% 1.11% 22 Table 9: Activity in Allowance for Loan Losses September 30, 2003 2002 ---------- ---------- (dollars in thousands) Balance at beginning of year $ 6,574 $ 5,205 Loans charged-off: Commercial (731) (545) Commercial real estate (99) (33) Mortgage (including home equity) (41) (68) Consumer (338) (230) Credit card (47) (84) Tax free - - ---------- ---------- Total loans charged-off (1,256) (960) Recoveries on loans previously charged-off: Commercial 23 34 Commercial real estate - 32 Mortgage (including home equity) 1 29 Consumer 50 75 Credit card 6 5 Tax free - - ---------- ---------- Total loan recoveries 80 175 --------- ---------- Net loans charged-off (1,176) (785) ---------- ---------- Provision for loan losses charged to expense 1,650 1,625 ---------- ---------- Ending balance $ 7,048 $ 6,045 ========== ========== Total loans outstanding $ 654,640 $ 573,767 Average loans outstanding $ 619,712 $ 540,500 Allowance for loan losses to loans outstanding 1.08% 1.05% Net charge-offs to average loans outstanding, annualized 0.25% 0.19%

Investment Portfolio The Company uses its securities portfolio to assist in maintaining proper interest rate sensitivity in the balance sheet, to provide securities to pledge as collateral for public funds and repurchase agreements and to provide an alternative investment for available funds. The total recorded value of securities was $90.6 million at September 30, 2003, an increase of 82% from $49.7 million at the end of 2002. The increase was primarily the result of the Company's desire to invest a portion of its excess liquidity into longer-dated investments in order to take advantage of higher yields on funds that were not expected to be immediately deployed into loans. Securities are classified as either held-to-maturity or available-for-sale. At September 30, 2003 investment securities available-for-sale made up 67% of the total investment portfolio of $90.6 million. Securities in the available-for-sale portfolio are recorded at fair value on the balance sheet and unrealized gains and losses associated with these securities are recorded, net of deferred income tax, as accumulated other comprehensive income (loss). Also included in other comprehensive income (loss) are accumulated net gains (losses) on cash flow hedges. At September 30, 2003, accumulated other comprehensive income (loss), net of tax, was ($838,000), compared to $108,000 at December 31, 2002. Of this amount, ($451,000) of unrealized losses, net of deferred income tax, were related to the securities available for sale portfolio while ($387,000) of unrealized losses, net of deferred income tax, were associated with cash flow hedges. The Company invests primarily in direct obligations of the United States, obligations guaranteed as to principal and interest by the United States and obligations of agencies of the United States government. In addition, the Company enters into federal funds transactions with its principal correspondent banks. The Federal Reserve Bank and FHLB also require equity investments to be maintained by the Company. The following tables set forth the maturity distribution and the weighted average yields of the Company's investment portfolio. 23 Table 10: Maturity Distribution of Investment Securities (1) September 30, 2003 (dollars in thousands) Held to Maturity Available for Sale ------------------------------------------------------------------------------------------------------------- Amortized Estimated Amortized Estimated Cost Market Value Cost Market Value --------- ------------ --------- ------------ U.S. Treasury: One year or less $ - $ - $ 4,023 $ 4,027 ------- ------- ------- ------- Total U.S. Treasury - - 4,023 4,027 U.S. Government Agencies and Corporations (2): Over one through five years - - 13,010 12,939 Over five through ten years 7,500 7,479 2,500 2,522 Over ten years 17,500 17,436 10,000 9,481 ------- ------- ------- ------- Total U.S. Government Agencies and Corporations 25,000 24,915 25,510 24,942 Obligations of State and Political Subdivisions: Over five through ten years - - 609 639 Over ten years - - 1,562 1,579 ------- ------- ------- ------- Total Obligations of State and Political Subdivisions - - 2,171 2,218 Mortgage-Backed Securities (3): Over one through five years - - 1,448 1,466 Over five through ten years 4,693 4,688 17,008 16,852 Over ten years - - 8,335 8,271 ------- ------- ------- ------- Total Mortgage-Backed Securities 4,693 4,688 26,791 26,589 Other Securities: Over ten years (4) - - 3,119 3,119 ------- ------- ------- ------- Total Other Securities - - 3,119 3,119 ======= ======= ======= ======= Total Securities $29,693 $29,603 $61,614 $60,895 ======= ======= ======= ======= ----------- (1) All securities, excluding Obligations of State and Political Subdivisions, are taxable. (2) Includes securities that may be callable prior to their stated maturity date. (3) Represents investments in mortgage-backed securities which are subject to early repayment. (4) Represents investment in Federal Reserve Bank and Federal Home Loan Bank stock and other marketable equity securities.

Table 11: Weighted Average Yield by Range of Maturities September December September 30, 2003 31,2002 30, 2002 One Year or Less 1.22% 2.41% 2.44% More than One through Five Years 2.15% 4.87% 5.23% More than Five through Ten Years 3.87% 4.48% 4.99% More than Ten Years (1) 4.84% 4.46% 4.58% ---------- (1) Includes adjustable rate mortgage-backed securities which are repriceable within one year.

Other Earning Assets Temporary investment needs are created in the day-to-day liquidity movement of the Bank and are satisfied by selling excess funds overnight (Fed Funds Sold) to larger, well capitalized banking institutions. If these funds become 24 excessive, management determines what portion, if any, of the liquidity may be rolled into longer term investments as securities. FUNDING SOURCES Deposits The Bank does not rely on purchased or brokered deposits as a source of funds. Instead, competing for deposits within its market area serves as the Bank's fundamental tool in providing a source of funds to be invested primarily in loans. The following table sets forth certain deposit categories for the periods ended September 30, 2003 and December 31, 2002. Table 12: Total Deposits September 30, December 31, 2003 2002 -------- ---------- (thousands) Non-interest bearing: Demand checking $ 94,720 $ 80,065 Interest bearing: NOW checking 132,678 118,619 Money market checking 130,470 95,354 Savings 25,401 22,311 Certificates of deposit 344,534 332,287 -------- -------- Total deposits $727,803 $648,636 ======== ======== CAPITAL RESOURCES Shareholders' equity at September 30, 2003 was $54.2 million, as compared to $50.9 million at December 31, 2002. During the first, second and third quarters of 2003, the Board of Directors declared quarterly dividends of $0.06 per share, an increase of 20% from the fourth quarter 2002 dividend. At September 30, 2003, the Company's common stock had a book value of $8.72 per share compared to $8.31 per share at December 31, 2002. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about component, risk weightings and other factors. Quantitative measures as defined by regulation and established to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. If such minimum amounts and ratios are met, the Bank is considered "adequately capitalized." If a bank exceeds the requirements of "adequately capitalized" and meets even more stringent minimum standards, it is considered to be "well capitalized." As of September 30, 2003, the Bank met all capital adequacy requirements to which it is subject. At September 30, 2003 and 2002, the Company's Tier 1 capital, Total risk-based capital and Tier 1 leverage ratios were are as follows: 25 Table 13: Capital Ratios September 30, Well-Capitalized Regulatory 2003 2002 Requirements Minimums ------------ ------------ ------------ -------- Risk Based Capital Ratios: Tier 1 Capital Ratio 7.7% 7.6% 6.0% 4.0% Total Capital to Risk-Weighted Assets 8.8% 8.7% 10.0% 8.0% Tier 1 Leverage Ratio 6.3% 6.4% 5.0% 4.0%

CRITICAL ACCOUNTING POLICIES A critical accounting policy is one that is both very important to the portrayal of the Company's financial condition and requires management's most difficult, subjective or complex judgments. The circumstances that make these judgments difficult, subjective or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain. The Company considers the establishment and maintenance of the allowance for loan loss and the accounting for its core deposit intangible asset to be critical accounting policies. The allowance for loan loss is established through a provision for loan loss charged to expense. Loans are charged against the allowance for loan loss when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb inherent losses on existing loans that may become uncollectible based on evaluations of the collectibility of the loans. The evaluations take into consideration such objective factors as changes in the nature and volume of the loan portfolio and historical loss experience. The evaluation also considers certain subjective factors such as overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers' ability to pay. The level of the allowance for loan loss is also impacted by increases and decreases in loans outstanding, because either more or less allowance is required as the amount of the Company's credit exposure changes. To the extent actual loan losses differ materially from management's estimate of these subjective factors, loan growth/run-off accelerates or the mix of loan types changes, the level of the provision for loan loss, and related allowance, can and will fluctuate. The accounting for the Company's core deposit intangible asset is also subject to significant estimates about future results. In connection with the acquisition of the Lake City and Live Oak branches of Republic Bank in 2001, the Company recorded a core deposit intangible of approximately $6,000,000. This intangible asset is being amortized on a straight-line basis over its estimated useful life of 10 years. The life of this asset was based on the estimated future period of benefit to the Company of the depositor relationships acquired. To the extent that the deposit accounts acquired leave the Company faster than anticipated, the amount of the core deposit intangible that is amortized each period could increase significantly, thus shortening its useful life. Through September 30, 2003, the performance of the depositor relationships did not differ materially from expectations. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In 1997 the Securities and Exchange Commission adopted amendments to Regulation S-K, Regulation S-X, and various forms to clarify and expand existing requirements for disclosures about derivatives and market risks inherent in derivatives and other financial instruments. As noted below, at September 30, 2003, the Company was a party to a single interest rate derivative contract. The Company also holds other financial instruments, which include investments, loans and deposit liabilities. The release requires quantitative and qualitative disclosures about market risk. See the section titled "Liquidity and Interest Rate Sensitivity" for further discussion on the Company's management of interest rate risk. The Company's sole derivative contract is a $10 million notional interest rate swap that was entered into as a hedge of interest rate risk inherent in the Company's $10 million term loan. Under the terms of the swap, the Company will receive a variable rate of interest equal to 90-day Libor plus 170 basis points, reset quarterly. The Company will pay a fixed rate of interest equal to 6.45% 26 for the life of the contract. All cash flows are computed based on the $10 million notional amount and are settled quarterly on a net basis. The contract matures October 3, 2006 and the notional amount will be reduced by $714,286 on a semi-annual basis beginning April 2004. The fair value of the swap at September 30, 2003, including interest accruals, was approximately ($628,000). The swap is being accounted for as a cash flow hedge of the variable interest payments under the $10 million term debt. Non-derivative financial instruments that have market risk are included in Table 3: "Rate Sensitivity Analysis". These instruments are shown by maturity, separated by fixed and variable interest rates. The estimated fair value of each instrument category is also shown in the table. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that, were the Company to have disposed of such instruments at September 30, 2003, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at September 30, 2003 would not necessarily be considered to apply at subsequent dates. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's Chief Financial Officer and Chief Executive Officer. Based upon that evaluation, the Company's Chief Financial Officer and Chief Executive Officer have concluded that the Company's disclosure controls and procedures are effective in alerting them to material information regarding the Company's financial statement and disclosure obligation in order to allow the Company to meet its reporting requirements under the Exchange Act in a timely manner. Changes in Internal Control There have been no changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 27 PART II OTHER INFORMATION Item 1. Legal Proceedings - There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. Item 2. Changes in Securities and Use of Proceeds - Not applicable. Item 3. Defaults Upon Senior Securities - Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - Not applicable. Item 5. Other Information - Not applicable. Item 6. Exhibits and Reports - (a) Exhibits: 3i Articles of Incorporation of CNB Florida Bancshares, Inc. (Exhibit 3(i) to the Company's Annual Report on Form 10-Q/A filed with the Commission on May 21, 2003 is hereby incorporated by reference.) 3ii By-Laws of CNB Florida Bancshares, Inc. (Exhibit 3(ii) to the Company's Annual Report on Form 10-Q/A filed with the Commission on May 21, 2003 is hereby incorporated by reference.) 31(a) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32(a) Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32(b) Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (a) Reports on Form 8-K: On July 24, 2003, the Company filed a Form 8-K to report its 2003 second quarter results. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CNB Florida Bancshares, Inc. (Registrant) By: /s/ G. Thomas Frankland --------------------------- G. Thomas Frankland Executive Vice President and Chief Financial Officer Date: November 12, 2003 29

CNB FLORIDA BANCSHARES INC 10-Q