UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2002 Commission File Number: 0-17501
CNB BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 14-1709485
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
10-24 North Main Street, P.O. Box 873, Gloversville, New York, 12078
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 773-7911
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 the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class of Common Stock as of November 12, 2002
$2.50 par value 2,228,987
CNB BANCORP, INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 Consolidated interim financial statements (unaudited):
Consolidated statements of income for the three months ended
September 30, 2002 and 2001 and the nine months ended September
30, 2002 and 2001 1
Consolidated statements of financial condition as of Septemebr
30, 2002 and December 31, 2001 2
Consolidated statements of cash flows for the nine months ended
September 30, 2002 and 2001 3
Notes to consolidated interim financial statements (unaudited) 4-5
Item 2 Management's discussion and analysis of financial condition and
results of operations 6-9
Item 3 Quantitative and qualitative disclosures about market risk 10
Item 4 Disclosure of evaluation of disclosure controls and procedures 11
PART II OTHER INFORMATION
Item 1 Legal proceedings - not applicable
Item 2 Changes in securities and use of proceeds - none
Item 3 Defaults upon senior securities - none
Item 4 Submission of matters to a vote of security holders - None
Item 5 Other information - none
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 13-14
Exhibit Index 15
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
INTEREST AND DIVIDEND INCOME 2002 2001 2002 2001
------------------- ------------------- ------------------- -------------------
Interest and fees on loans $3,652 $3,985 $11,110 $11,885
Interest on federal funds sold 57 73 165 190
Interest on balances due
from depository institutions 51 21 79 31
Interest on securities available
for sale 1,619 1,796 4,890 5,489
Interest on investment securities 130 153 406 573
Dividends on FRB and FHLB stock 30 37 96 125
------------------- ------------------- ------------------- -------------------
Total interest and dividend income 5,539 6,065 16,746 18,293
INTEREST EXPENSE
Interest on deposits:
Regular savings, NOW and money
market accounts 551 599 1,612 2,011
Certificates and time deposits of
$100,000 or more 226 606 679 1,901
Other time deposits 829 1,166 2,621 3,552
Interest on securities sold under
agreements to repurchase 150 146 449 438
Interest on other borrowings 337 367 959 1,104
------------------- ------------------- ------------------- -------------------
Total interest expense 2,093 2,884 6,320 9,006
NET INTEREST INCOME 3,446 3,181 10,426 9,287
Provision for loan losses 355 185 890 395
------------------- ------------------- ------------------- -------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,091 2,996 9,536 8,892
OTHER INCOME
Income from fiduciary activities 40 44 142 140
Service charges on deposit accounts 163 160 455 459
Net gain on securities transactions 31 - 31 15
Insurance commissions 149 138 638 617
Other income 251 189 550 455
------------------- ------------------- ------------------- -------------------
Total other income 634 531 1,816 1,686
OTHER EXPENSES
Salaries and employee benefits 1,034 969 3,159 2,944
Occupancy expense, net 120 138 375 391
Furniture and equipment expense 103 108 335 343
External data processing expense 227 205 677 596
Other expense 523 596 1,673 1,889
------------------- ------------------- ------------------- -------------------
Total other expenses 2,007 2,016 6,219 6,163
------------------- ------------------- ------------------- -------------------
INCOME BEFORE INCOME TAXES 1,718 1,511 5,133 4,415
Provision for income taxes 494 477 1,497 1,375
------------------- ------------------- ------------------- -------------------
NET INCOME $1,224 $1,034 $ 3,636 $ 3,040
=================== =================== =================== ===================
Earnings per share
Basic $ 0.54 $ 0.46 $ 1.60 $ 1.32
Diluted 0.54 0.45 1.58 1.30
See accompanying notes to consolidated interim financial statements
-1-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
ASSETS September 30, 2002 December 31, 2001
---------------------------- ----------------------------
Cash and cash equivalents:
Non-interest bearing $ 13,806 $ 11,212
Interest bearing 16,938 317
Federal funds sold 14,000 8,200
---------------------------- ----------------------------
Total cash and cash equivalents 44,744 19,729
Securities available for sale, at fair value 130,461 120,249
Investment securities, at cost (approximate fair value at
September 30, 2002 - $9,682; at December 31, 2001 - $10,241) 9,233 9,955
Investments required by law, stock in Federal Home Loan
Bank of New York and Federal Reserve Bank of New York,
at cost 3,114 2,853
Loans 204,605 211,683
Unearned income (15,505) (16,734)
Allowance for loan losses (3,038) (2,506)
---------------------------- ----------------------------
Net loans 186,062 192,443
Premises and equipment, net 3,599 3,420
Accrued interest receivable 2,066 1,661
Other assets 12,210 9,645
---------------------------- ----------------------------
Total assets $391,489 $359,955
============================ ============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non-interest bearing) $ 30,382 $ 28,103
Regular savings, NOW and money market accounts 148,036 130,311
Certificates and time deposits of $100,000 or more 33,349 34,061
Other time deposits 89,549 86,752
---------------------------- ----------------------------
Total deposits 301,316 279,227
Securities sold under agreements to repurchase 12,256 11,629
Notes payable - Federal Home Loan Bank 38,213 32,989
Other liabilities 2,039 1,461
---------------------------- ----------------------------
Total liabilities 353,824 325,306
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value, 5,000,000 shares authorized,
2,401,695 shares issued 6,004 6,004
Surplus 4,418 4,418
Undivided profits 29,947 27,608
Accumulated other comprehensive income 1,978 481
Treasury stock, at cost; 152,987 shares at September 30, 2002 and
124,553 shares at December 31, 2001 (4,682) (3,862)
---------------------------- ----------------------------
Total stockholders' equity 37,665 34,649
---------------------------- ----------------------------
Total liabilities and stockholders' equity $391,489 $359,955
============================ ============================
See accompanying notes to consolidated interim financial statements
-2-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---------------------- -----------------------
Cash flows from operating activities:
Net income $ 3,636 $ 3,040
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase)/decrease in interest receivable (405) 180
Increase in other assets (246) (166)
Increase in other liabilities 578 190
Deferred income tax (benefit)/expense (274) 85
Goodwill amortization expense - 256
Depreciation and other amortization expense 406 381
Net increase in cash surrender value of bank-owned
life insurance (136) (87)
Amortization/(accretion) of premiums/discounts on
securities, net 189 (31)
Net gain on securities transactions (31) (15)
Provision for loan losses 890 395
---------------------- -----------------------
Total adjustments 971 1,188
---------------------- -----------------------
Net cash provided by operating activities 4,607 4,228
---------------------- -----------------------
Cash flows from investing activities:
Purchase of investment securities (1,303) (1,626)
Purchase of securities available for sale (57,159) (56,291)
Net purchase of FRB and FHLB stock (261) (541)
Proceeds from maturities, paydowns and calls of
investment securities 2,015 6,960
Proceeds from maturities, paydowns and calls of
securities available for sale 49,251 53,705
Net decrease/(increase) in loans 5,355 (12,371)
Purchase of bank-owned life insurance (2,850) -
Purchases of premises and equipment, net (463) (220)
-------------------- -----------------------
Net cash used by investing activities (5,415) (10,384)
-------------------- -----------------------
Cash flows from financing activities:
Net increase in deposits 22,089 10,622
Increase/(decrease) in securities sold under
agreements to repurchase 627 (1,121)
Increase in notes payable - FHLB 5,224 10,738
Treasury stock purchased (1,760) (2,985)
Cash dividends paid on common stock (1,178) (1,132)
Proceeds from the sale of treasury stock 821 739
-------------------- -----------------------
Net cash provided by financing activities 25,823 16,861
-------------------- -----------------------
Net increase in cash and cash equivalents 25,015 10,705
Cash and cash equivalents beginning of period 19,729 14,838
-------------------- -----------------------
Cash and cash equivalents end of period $44,744 $25,543
==================== =======================
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 6,409 $ 8,979
Income taxes 1,680 1,071
Supplemental schedule of noncash investing activities:
Net reduction in loans resulting from the transfer
to real estate owned $ 80 $ 24
Decrease in taxes payable due to exercise of
non-qualified stock options 48 104
See accompanying notes to consolidated interim financial statements
-3-
CNB BANCORP, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of CNB Bancorp, Inc. (the Company),
City National Bank and Trust Company (subsidiary Bank) and Hathaway Agency,
Inc. (subsidiary Insurance Agency) conform to accounting principles generally
accepted in the United States of America in a consistent manner and are in
accordance with the general practices within the financial services industry.
Amounts in the prior periods' consolidated financial statements are
reclassified, whenever necessary, to conform to the presentation in the
current periods' consolidated financial statements.
In the opinion of CNB Bancorp, Inc. management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to
present fairly the consolidated financial position as of September 30, 2002
and December 31, 2001, and the results of operations for the three and nine
months ended September 30, 2002 and 2001 and the changes in cash flows for
the nine months ended September 30, 2002 and 2001. All accounting adjustments
made for these periods were of a normal recurring nature. The accompanying
interim consolidated financial statements should be read in conjunction with
CNB Bancorp, Inc.'s consolidated year-end financial statements including
notes thereto, which are included in CNB Bancorp, Inc.'s 2001 Annual Report
on Form 10-K.
2. EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings per common
share (EPS) for the three month and nine month periods ended September 30,
2002 and 2001. (In thousands, except per share amounts)
Weighted
Net Average
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- ------------------- -------------------
For the Three Months Ended September 30, 2002:
Basic EPS $1,224 2,256 $0.54
===================
Dilutive Effect of Stock Options - 18
-------------------- -------------------
Diluted EPS $1,224 2,274 $0.54
==================== =================== ===================
For the Three Months Ended September 30, 2001:
Basic EPS $1,034 2,272 $0.46
===================
Dilutive Effect of Stock Options - 48
-------------------- -------------------
Diluted EPS $1,034 2,320 $0.45
==================== =================== ===================
For the Nine Months Ended September 30, 2002:
Basic EPS $3,636 2,266 $1.60
===================
Dilutive Effect of Stock Options - 29
-------------------- -------------------
Diluted EPS $3,636 2,295 $1.58
==================== =================== ===================
For the Nine Months Ended September 30, 2001:
Basic EPS $3,040 2,311 $1.32
===================
Dilutive Effect of Stock Options - 36
-------------------- -------------------
Diluted EPS $3,040 2,347 $1.30
==================== =================== ===================
3. COMPREHENSIVE INCOME
The Company recorded total comprehensive income of $1,800,000 for the three
months ended September 30, 2002 as compared to total comprehensive income of
$2,017,000 for the three months ended September 30, 2001. For the nine month
periods ended September 30, 2002 and 2001, the Company recorded total
comprehensive income of $5,133,000 and $4,527,000, respectively. At the
Company, comprehensive income represents net income plus other comprehensive
income/(loss), which consists of the after tax net change in unrealized gains
and losses on securities available for sale for the period.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets."
Statement No. 141 supercedes Accounting Principles Board ("APB") No. 16,
-4-
"Business Combinations," and requires all business combinations to be
accounted for under the purchase method of accounting, thus eliminating the
pooling of interests method of accounting. The Statement did not change many
of the provisions of APB No. 16 related to the application of the purchase
method. However, the Statement does specify criteria for recognizing
intangible assets separate from goodwill and requires additional disclosures
regarding business combinations. The Statement is effective for business
combinations initiated after June 30, 2001.
Statement No. 142 requires acquired intangible assets (other than goodwill)
to be amortized over their useful economic life, while goodwill and any
acquired intangible asset with an indefinite economic life would not be
amortized, but would be reviewed for impairment on an annual basis. Statement
No. 142 also requires additional disclosures pertaining to goodwill and
intangible assets. The provisions of Statement No. 142 were required to be
adopted starting with fiscal years beginning after December 15, 2001.
Accordingly, the Company adopted the Statement on January 1, 2002. The
Company performed the first of the required impairment tests of goodwill
during the quarter ending March 31, 2002. Based on management's evaluation,
the Company determined that no transitional impairment losses were required
to be recognized as of January 1, 2002 as a cumulative effect of a change in
accounting principle. The adoption of Statement No. 142 eliminated non-tax
deductible goodwill amortization expense of approximately $85,000 or $.04 per
diluted share during the three months ended September 30, 2002 and
approximately $256,000 or $.11 per diluted share during the nine months ended
September 30, 2002.
5. CRITICAL ACCOUNTING POLICIES
Pursuant to recent SEC guidance, management of public companies are
encouraged to evaluate and disclose those accounting policies that are judged
to be critical policies, that is, those most important to the portrayal of
the Company's financial condition and results, and that require management's
most difficult subjective or complex judgments. Management of the Company
considers the accounting policy relating to the allowance for loan losses to
be a critical accounting policy given the inherent subjectivity and
uncertainty in estimating the levels of the allowance required to cover
credit losses in the portfolio and the material effect that such judgments
can have on the consolidated financial statements. Included in Note 1 to the
consolidated financial statements contained in the Company's 2001 Annual
Report is a description of this critical policy and the other significant
accounting policies that are utilized by the Company in the preparation of
the consolidated financial statements.
-5-
CNB BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL:
CNB Bancorp, Inc. (the Company), a New York corporation, organized in 1988,
is a registered financial holding company headquartered in Gloversville, New
York. Its wholly-owned subsidiaries, City National Bank and Trust Company
(the subsidiary Bank) and Hathaway Agency, Inc. (the subsidiary Insurance
Agency), were organized in 1887 and 1915, respectively, and are also
headquartered in Gloversville, New York. The subsidiary Bank has five
branches located in the county of Fulton and one branch located in the county
of Saratoga. The subsidiary Insurance Agency has one office located in the
county of Fulton. The subsidiary Bank is a full service commercial bank that
offers a broad range of demand and time deposits; consumer, mortgage, and
commercial loans; and trust and investment services. The subsidiary Bank is a
member of the Federal Deposit Insurance Corporation and the Federal Reserve
System and is subject to regulation and supervision of the Federal Reserve
and the Comptroller of the Currency. The subsidiary Insurance Agency offers a
broad range of general insurance products and is under the supervision of the
State Insurance Department.
Except for historical information contained herein, the matters contained in
this review are "forward-looking statements" that involve risks and
uncertainties, including statements concerning future events or performance
and assumptions and other statements which are other than statements of
historical facts. The Company wishes to caution readers that the following
important factors, among others, could in the future affect the Company's
actual results and could cause the Company's actual results for subsequent
periods to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company herein:
* the effect of changes in laws and regulations, including federal and
state banking laws and regulations, with which the Company and its
banking subsidiary must comply, the cost of such compliance and the
potentially material adverse effects if the Company or its banking
subsidiary were not in substantial compliance either currently or in
the future as applicable;
* the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's organization,
compensation and benefit plans;
* the effect on the Company's competitive position within its market area
of increasing consolidation within the banking industry and increasing
competition from larger "super regional" and other banking
organizations as well as non-bank providers of various financial
services;
* the effect of unforeseen changes in interest rates and;
* the effects of changes in the business cycle and downturns in the local,
regional or national economies.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
cause the Company's actual results or circumstances for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL REVIEW:
Financial Condition:
Total assets at September 30, 2002 were $391.5 million, an increase of $31.5
million, or 8.8%, over the December 31, 2001 amount of $360.0 million. The
increase was primarily related to an increase in securities available for
sale of $10.2 million and an increase in cash and cash equivalents of $25.0
million. These increases were partially offset by a decrease in loans, net of
unearned discount, of $5.8 million. The asset growth was primarily financed
by deposit growth of $22.1 million, increased Federal Home Loan Bank
borrowings of $5.2 million, and an increase in undivided profits of $2.3
million.
Securities available for sale increased by $10.2 million, or 8.5%, from
$120.2 million at December 31, 2001, to $130.5 million at September 30, 2002
primarily as a result of the investment of available funds from deposit
growth and increased borrowings from the Federal Home Loan Bank.
Loans receivable, net of unearned income, decreased $5.8 million, or 3.0%
from $194.9 million at December 31, 2001 to $189.1 million at September 30,
2002. The commercial portfolio increased by $0.7 million from December 31,
2001. However, the consumer installment and residential mortgage portfolios
were down $4.1 million and $2.5 million, respectively. These decreases were
due to a decline in
-6-
indirect auto lending and a slowdown in consumer mortgage applications. Since
the subsidiary Bank is a portfolio lender, we have chosen not to match the
lower rates being offered in our market by originators and sellers of loans.
Cash and cash equivalents increased by $25.0 million, or 126.8%, from $19.7
million at December 31, 2001, to $44.7 million at September 30, 2002
primarily as a result of the accelerated principal paydowns on mortgage
backed securities due to the low interest rate environment and the overall
deposit growth during the first nine months of 2002.
Deposits at September 30, 2002 were $301.3 million, an increase of $22.1
million, or 7.9%, over the balance of $279.2 million at December 31, 2001.
This increase is primarily attributed to the increase in demand deposits,
regular savings accounts, cash management accounts and money market accounts,
partially offset by the decrease in NOW accounts, certificates and time
deposits of $100,000 or more and mortgage escrow accounts.
Stockholders' equity increased to $37.7 million at September 30, 2002 from
$34.6 million at December 31, 2001, an increase of 8.7%. This increase was
primarily due to the retention of earnings, less dividends paid, during the
first nine months of 2002 coupled with the increase in the accumulated other
comprehensive income related to the securities available for sale portfolio,
less the net cost of the purchases and sales of treasury stock.
Liquidity:
Liquidity is defined as the ability to generate sufficient cash flow to meet
all present and future funding commitments, depositor withdrawals and
operating expenses. Management monitors the Company's liquidity position on a
daily basis and evaluates its ability to meet depositor withdrawals or make
new loans or investments.
There have been no trends or demands that have affected the Company's or the
subsidiary Bank's liquidity position in any material way during the first
nine months of 2002. The timing of cash inflows and outflows is closely
monitored by management although changes in interest rates, economic
conditions, and competitive forces strongly impact the predictability of
these cash flows. Funds from repayment of loans, maturing investment
securities and securities available for sale, and additional borrowings from
the Federal Home Loan Bank are available to satisfy liquidity needs that may
arise.
Management believes that the level of the Company's liquid assets combined
with daily monitoring of cash inflows and outflows provide adequate liquidity
to fund outstanding loan commitments, meet daily withdrawal requirements of
depositors, and meet all other daily obligations of the Company.
Capital Resources:
Stockholders' equity to total assets remained virtually unchanged during the
first nine months of 2002 at 9.6%. The retention of earnings during the first
nine months of 2002, less dividends paid and the purchase of treasury stock
as well as the increase in accumulated other comprehensive income caused this
ratio to remain virtually unchanged from December 31, 2001.
The table below shows the Company's September 30, 2002 ratios, December 31,
2001 ratios and the current regulatory guideline ratios for classification as
well capitalized as established by the Federal Reserve Board.
Regulatory
September 30, 2002 December 31, 2001 Guidelines
Tier 1 risk based capital to net risk weighted assets 15.0% 14.7% 6.0%
Total risk based capital to net risk weighted assets 16.3 16.0 10.0
Leverage ratio (Tier 1/adjusted total assets) 8.3 8.4 5.0
These ratios are well in excess of regulatory minimums.
Results of Operations:
Most Recent Quarter and Same Quarter in Preceding Year:
Total interest and dividend income for the third quarter of 2002 decreased
$526,000 or 8.7% from the corresponding period in 2001, while total interest
expense decreased $791,000 or 27.4% from the corresponding period in 2001.
Net interest income increased $265,000 or 8.3% from the corresponding period
of 2001. This increase is due to growth in money market instruments and
securities
-7-
available for sale, partially offset by deposit growth and additional
borrowings from the Federal Home Loan Bank and an increase in the net
interest margin to 4.11% in the current quarter from 4.00% for the
corresponding period of 2001.
The decrease in interest and fees on loans of $333,000 or 8.4% from the
corresponding period of 2001 is primarily due to the decline in interest
rates on the total loan portfolio of 45 basis points from 8.07% for the third
quarter of 2001 to 7.62% for the same period of 2002. This decrease was also
due to the decrease of $5.8 million in the average volume outstanding
compared to the same period of 2001.
The decrease in interest on securities available for sale of $177,000 and the
decrease in interest on investment securities of $23,000 from the
corresponding period of 2001 is primarily due to the lower rates on the
overall securities portfolio as compared to the same period of 2001. The
fully tax effected yield declined 99 basis points from 6.73% for the third
quarter of 2001 to 5.74% for the third quarter of 2002.
The decrease in interest expense of $791,000 for the third quarter of 2002 as
compared to the same period of 2001 is primarily related to the overall
decrease in the average rates being paid in the third quarter of 2002 on all
deposit and borrowed fund categories as compared to the same period of 2001.
The average rate paid on interest-bearing liabilities for the third quarter
of 2002 was 2.65% as compared to 3.88% for the same period of 2001.
The provision for loan losses increased $170,000 from the corresponding
period in 2001 to $355,000. Net charge-offs decreased to $110,000 in the
current quarter compared to $227,000 in the prior year period. Non-performing
loans increased from $533,000 at December 31, 2001 to $2,187,000 at September
30, 2002, an increase of $1,654,000. This increase primarily relates to two
commercial loan relationships. The provision in both quarters was deemed to
be adequate based on the overall evaluation of the allowance for loan losses
as of September 30, 2002 and 2001. The allowance for loan losses as a percent
of net loans outstanding was 1.61% at September 30, 2002 as compared to 1.29%
at December 31, 2001 and 1.28% at September 30, 2001.
Non-interest income increased $103,000 or 19.4% from the corresponding period
of 2001. This increase was primarily due to the gain on the sale of
securities available for sale of $31,000, the increase in the dividend on
credit life and accident and sickness insurance of $31,000 and the increase
in insurance commission income from the Hathaway Agency, Inc. (subsidiary
insurance agency) of $11,000.
Non-interest expense remained virtually unchanged decreasing $9,000 or 0.4%
from the corresponding period of 2001. Increases in salaries and employee
benefits and external data processing expense were offset by a decrease in
other expense. The higher salaries and employee benefits were due to normal
salary adjustments and increased medical insurance expense. The higher
external data processing expense is primarily due to more accounts and
additional ATM and debit card usage. The offsetting decrease in other expense
is primarily related to the elimination of $85,000 of goodwill amortization
related to the acquisition of Adirondack Financial Services Bancorp, Inc.
Net income increased $190,000 or 18.4% as compared to the same period of
2001. This increase was primarily due to the increases in the net interest
income and non-interest income and the decrease in other expense more than
offsetting the increase in the provision for loan losses.
Most Recent Year to Date and Corresponding Year to Date Period:
Total interest and dividend income for the first nine months of 2002
decreased $1,547,000 or 8.5% from the corresponding period in 2001, while
total interest expense decreased $2,686,000 or 29.8% from the corresponding
period in 2001. Net interest income increased $1,139,000 or 12.3% from the
corresponding period of 2001. This increase is due to growth in average loans
net of unearned discount, money market instruments and securities available
for sale, partially offset by deposit growth and additional borrowings from
the Federal Home Loan Bank. The increase in the net interest margin to 4.21%
in the current period from 3.97% for the corresponding period of 2001 also
contributed to the increase in the net interest income for the current
period.
The decrease in interest and fees on loans of $775,000 or 6.5% from the
corresponding period of 2001 is primarily due to the decline in interest
rates on the total loan portfolio of 57 basis points from 8.26% for the first
nine months of 2001 to 7.69% for the same period of 2002. This decline in
rate was partially offset by an increase of $0.9 million in the average
volume outstanding compared to the same period of 2001.
The decrease in interest on securities available for sale of $599,000 and the
decrease in interest on investment securities of $167,000 from the
corresponding period of 2001 is primarily due to the lower rates on the
overall securities portfolio as compared to the same period of 2001. The
fully tax effected yield declined 101 basis points from 6.86% for the first
nine months of 2001 to 5.85% for the first nine months of 2002. This decline
in rate was partially offset by an increase of $5.5 million in the average
volume outstanding compared to the same period of 2001.
-8-
The decrease in interest expense of $2,686,000 for the first nine months of
2002 as compared to the same period of 2001 is primarily related to the
overall decrease in the average rates being paid during the first nine months
of 2002 on all deposit and borrowed fund catergories as compared to the same
period of 2001. The average rate paid on interest-bearing liabilities during
the first nine months of 2002 was 2.78% as compared to 4.16% in the same
period of 2001.
The provision for loan losses increased $495,000 from the corresponding
period in 2001 to $890,000. The Company establishes an allowance for loan
losses based on an analysis of risk factors in its loan portfolio. The
analysis includes concentrations of credit, past loan loss experience,
current economic conditions, amount and composition of the loan portfolio,
estimated fair market value of underlying collateral, delinquencies and other
factors. The increase in the provision primarily relates to the increase in
non-performing loans and the general economic conditions in the subsidiary
Bank's service area. Net charge-offs decreased to $358,000 in the current
nine month period compared to $613,000 in the prior year period.
Non-performing loans increased from $533,000 at December 31, 2001 to
$2,187,000 at September 30, 2002, an increase of $1,654,000. This increase
primarily relates to two commercial loan relationships. One of these
relationships is expected to be paid out by December 31, 2002 and the other
was paid through liquidation of collateral in October 2002. The provision for
both periods was deemed to be adequate based on the overall evaluation of the
allowance for loan losses as of September 30, 2002 and 2001. The allowance
for loan losses as a percent of net loans outstanding was 1.61% at September
30, 2002 as compared to 1.29% at December 31, 2001 and 1.28% at September 30,
2001.
Non-interest income increased $130,000 or 7.7% from the corresponding period
of 2001. This increase was primarily due to the increase in insurance
commission income from the Hathaway Agency, Inc. (subsidiary insurance
agency) of $21,000, the additional usage fees from debit cards of $27,000,
the increase in the dividend on credit life and accident and sickness
insurance of $31,000 and the increase in merchant income from credit card
sales of $16,000.
Non-interest expense increased $56,000 or 0.9% from the corresponding period
of 2001 due primarily to increases in salaries and employee benefits and
external data processing expense. This was partially offset by a decrease in
other expense. The higher salaries and employee benefits were due to normal
salary adjustments and increased medical insurance expense. The higher
external data processing expense is primarily due to more accounts and
additional ATM and debit card usage. The offsetting decrease in other expense
is primarily related to the elimination of $256,000 of goodwill amortization
related to the acquisition of Adirondack Financial Services Bancorp, Inc.
Net income increased $596,000 or 19.6% as compared to the same period of
2001. This increase was primarily due to the increase in the net interest
income and the increase in non-interest income more than offsetting the
increase in the provision for loan losses and the increase in non-interest
expense.
-9-
CNB BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The subsidiary Bank's market risk arises primarily from
interest rate risk inherent in its lending and deposit taking activities.
Although the subsidiary Bank manages other risks, such as credit and
liquidity risk, in the normal course of its business, management considers
interest rate risk to be its most significant market risk and could
potentially have the largest material effect on the subsidiary Bank's
financial condition and results of operation. The subsidiary Bank does not
currently have a trading portfolio or use derivatives to manage market and
interest rate risk.
The subsidiary Bank's interest rate risk management is the responsibility of
the Asset/Liability Management Committee (ALCO), which reports to the Board
of Directors. The ALCO, comprised of senior management, has developed
policies to measure, manage and monitor interest rate risk. Interest rate
risk arises from a variety of factors, including differences in the timing
between the contractual maturity or repricing of the subsidiary Bank's assets
and liabilities. For example, the subsidiary Bank's net interest income is
affected by changes in the level of market interest rates as the repricing
characteristics of its loans and other assets do not necessarily match those
of its deposits, other borrowings and capital.
In managing exposure, the subsidiary Bank uses interest rate sensitivity
models that measure both net gap exposure and earnings at risk. The ALCO
monitors the volatility of its net interest income by managing the
relationship of interest rate sensitive assets to interest rate sensitive
liabilities. The ALCO utilizes a simulation model to analyze net income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both an immediate 200 basis point rise or fall in
interest rates over a twelve month period. The model is based on the actual
maturity and repricing characteristics of interest rate assets and
liabilities. The model incorporates assumptions regarding the impact of
changing interest rates on the prepayment rate of certain assets and
liabilities.
The following table shows the approximate effect on the subsidiary Bank's
annualized net interest income, on a tax equivalent basis, as of September
30, 2002 assuming the immediate increases or decreases in interest rates
shown below:
Change in Estimated Net Change in
Interest Rate Interest Income Net Interest
(basis points) ($000 omitted) Income
+200 14,453 3.7%
+100 14,246 2.2
0 13,942 0.0
-100 13,785 (1.1)
-200 13,183 (5.4)
Another tool used to measure interest rate sensitivity is the cumulative gap
analysis. The cumulative gap represents the net position of assets and
liabilities subject to repricing in specified time periods. Deposit accounts
without specified maturity dates are modeled based on historical run-off
characteristics of these products in periods of rising rates. As of September
30, 2002, the subsidiary Bank was in an asset sensitive or "positive gap"
position which means that more assets are scheduled to mature or reprice
within the next year than liabilities. The cumulative interest rate
sensitivity gap as of September 30, 2002 was 1.02% of total assets.
The cumulative gap analysis is merely a snapshot at a particular date and
does not fully reflect that certain assets and liabilities may have similar
repricing periods but may in fact reprice at different times within that
period and at differing rate levels. Management, therefore, uses the interest
rate sensitivity gap only as a general indicator of the potential effects of
interest rate changes on net interest income. Management believes that the
gap analysis is a useful tool only when used in conjunction with its
simulation model and other tools for analyzing and managing interest rate
risk.
-10-
CNB BANCORP, INC.
DISCLOSURE OF EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President and Chief Executive
Officer and Vice President and Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the President and Chief Executive Officer and Vice President and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Company's periodic SEC filings.
There were no significant changes made in the Company's internal controls or
in other factors that could significantly affect these internal controls
subsequent to the date of the evaluation performed by the Company's Chief
Executive Officer and Chief Financial Officer.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as a part of this report:
Exhibit No. Exhibit
3.1 Restated Certificate of Incorporation of CNB Bancorp, Inc.
(Incorporated by reference to the current report on Form
8-K filed on August 10, 2001.)
3.2 Bylaws of CNB Bancorp, Inc.
(Incorporated by reference to the annual report on Form 10-K
filed on March 31, 1996.)
4. Instruments Defining the Rights of Security Holders.
(See Exhibits 3.1 and 3.2)
99.1 Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) - Reports on Form 8-K - None
-11-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CNB BANCORP, INC.
By /s/ William N. Smith
-----------------------------
William N. Smith, Chairman of the Board,
President and Chief Executive Officer
(chief executive officer)
By /s/ George A. Morgan
-----------------------------
George A. Morgan, Vice President and
Secretary
(principal financial and accounting officer)
Dated: November 12, 2002
-12-
CNB BANCORP, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, William N. Smith, Chairman, President and Chief Executive Officer of
CNB Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact orinternal controls subsequent to the
date of the evaluation performed by the Company's Chief Executive Officer and
Chief Financial material fact necessary to make the statements made, in light
of the circumstances under which such statements wOfficer., not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosur controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date November 12, 2002
- -----------------------------------------------------------------
By /s/ William N. Smith
- -----------------------------------------------------------------
William N. Smith, Chairman, President and Chief Executive Officer
-13-
CERTIFICATION
I, George A. Morgan, Vice President, Secretary and Chief Financial
Officer of CNB Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNB Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all
material respects, the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date November 12, 2002
- -----------------------------------------------------------------------
By /s/ George A. Morgan
- -----------------------------------------------------------------------
George A. Morgan, Vice President, Secretary and Chief Financial Officer
-14-
CNB BANCORP, INC.
EXHIBIT INDEX
Exhibit No. Description
3.1 Restated Certificate of Incorporation of CNB Bancorp, Inc.
(Incorporated by reference to the current report on Form 8-K
filed on August 10, 2001.)
3.2 Bylaws of CNB Bancorp, Inc.
(Incorporated by reference to the annual report on Form 10-K
filed on March 31, 1996.)
4. Instruments Defining the Rights of Security Holders.
(See Exhibits 3.1 and 3.2)
99.1 Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
-15-
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CNB Bancorp, Inc. (the "Company")
on Form 10-Q for the period ending September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
William N. Smith, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ William N. Smith
- --------------------
William N. Smith
Chief Executive Officer
November 12, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CNB Bancorp, Inc. (the "Company")
on Form 10-Q for the period ending September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
George A. Morgan, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ George A. Morgan
- --------------------
George A. Morgan
Chief Financial Officer
November 12, 2002