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 March 31, 2003 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 May 12, 2003
$2.50 par value 2,221,761
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 March 31, 2003 and 2002 1
Consolidated statements of financial condition as of March 31, 2003 and December 31, 2002 2
Consolidated statements of cash flows for the three months ended March 31, 2003 and 2002 3
Notes to consolidated interim financial statements (unaudited) 4 - 6
Item 2 Management's discussion and analysis of financial condition and results of operations 7 - 9
Item 3 Quantitative and qualitative disclosures about market risk 10
Item 4 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
MARCH 31,
2003 2002
------------------- -------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,358 $3,790
Interest on federal funds sold 39 53
Interest on balances due from depository institutions 54 13
Interest on securities available for sale 1,529 1,592
Interest on investment securities 145 139
Dividends on FRB and FHLB stock 45 32
------------------- -------------------
Total interest and dividend income 5,170 5,619
INTEREST EXPENSE
Interest on deposits:
Regular savings, NOW and money market accounts 411 516
Certificates and time deposits of $100,000 or more 231 247
Other time deposits 713 898
Interest on securities sold under agreements to repurchase 148 149
Interest on other borrowings 313 299
------------------- -------------------
Total interest expense 1,816 2,109
NET INTEREST INCOME 3,354 3,510
Provision for loan losses 385 310
------------------- -------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,969 3,200
OTHER INCOME
Income from fiduciary activities 40 43
Service charges on deposit accounts 162 139
Insurance commissions 357 364
Other income 153 154
------------------- --------------------
Total other income 712 700
OTHER EXPENSES
Salaries and employee benefits 1,185 1,063
Occupancy expense, net 155 125
Furniture and equipment expense 119 118
External data processing expense 258 205
Other expense 485 558
------------------- -------------------
Total other expenses 2,202 2,069
------------------- -------------------
INCOME BEFORE INCOME TAXES 1,479 1,831
Provision for income taxes 396 550
------------------- -------------------
NET INCOME $1,083 $1,281
=================== ===================
Earnings per share
Basic $0.49 $0.56
Diluted 0.49 0.55
See accompanying notes to consolidated interim financial statements
-1-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
March 31, 2003 December 31, 2002
------------------ ------------------
ASSETS
Cash and cash equivalents:
Non-interest bearing $9,917 $11,252
Interest bearing 19,252 12,508
Federal funds sold 13,500 10,900
------------------- ------------------
Total cash and cash equivalents 42,669 34,660
Securities available for sale, at fair value 147,104 144,219
Investment securities, at cost (approximate fair
value at March 31, 2003 - $9,727; at December 31, 2002 - $9,975) 9,331 9,569
Investments required by law, stock in Federal Home Loan
Bank of New York and Federal Reserve Bank of New York,
at cost 3,203 3,161
Loans 194,433 201,017
Unearned income (13,773) (14,753)
Allowance for loan losses (3,389) (3,083)
------------------- ------------------
Net loans 177,271 183,181
Premises and equipment, net 4,710 3,996
Accrued interest receivable 2,271 1,801
Goodwill 3,960 3,960
Other assets 7,639 7,257
------------------- ------------------
Total assets $398,158 $391,804
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non-interest bearing) $27,905 $27,827
Regular savings, NOW and money market accounts 153,246 152,469
Certificates and time deposits of $100,000 or more 33,424 29,663
Other time deposits 91,880 90,657
------------------- ------------------
Total deposits 306,455 300,616
Securities sold under agreements to repurchase 11,874 13,570
Notes payable - Federal Home Loan Bank 40,023 39,119
Other liabilities 2,401 1,615
------------------- ------------------
Total liabilities 360,753 354,920
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 31,128 30,517
Accumulated other comprehensive income 1,266 1,299
Treasury stock, at cost; 179,934 shares at March 31, 2003 and
176,491 shares at December 31, 2002 (5,411) (5,354)
------------------- ------------------
Total stockholders' equity 37,405 36,884
------------------- ------------------
Total liabilities and stockholders' equity $398,158 $391,804
=================== ==================
See accompanying notes to consolidated interim financial statements
-2-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------------- -------------------
Cash flows from operating activities:
Net income $1,083 $1,281
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in interest receivable (470) (574)
(Increase)/decrease in other assets (143) 264
Increase in other liabilities 786 623
Deferred income tax benefit (159) (121)
Depreciation and other amortization expense 93 135
Net increase in cash surrender value of bank-owned life insurance (67) (33)
Amortization of premiums/discounts on securities, net 285 64
Provision for loan losses 385 310
------------------- -------------------
Total adjustments 710 668
------------------- -------------------
Net cash provided by operating activities 1,793 1,949
------------------- -------------------
Cash flows from investing activities:
Purchase of investment securities -- (277)
Purchase of securities available for sale (29,045) (18,695)
Net purchase of FRB and FHLB stock (42) (94)
Proceeds from maturities, paydowns and calls of investment securities 235 283
Proceeds from maturities, paydowns and calls of securities available for sale 25,825 10,631
Net decrease/(increase) in loans 5,496 (258)
Purchases of premises and equipment, net (770) (179)
------------------- -------------------
Net cash provided/(used) by investing activities 1,699 (8,589)
------------------- -------------------
Cash flows from financing activities:
Net increase in deposits 5,839 8,032
(Decrease)/increase in securities sold under agreements to repurchase (1,696) 467
Increase in notes payable - FHLB 904 1,909
Treasury stock purchased (233) (200)
Cash dividends paid on common stock (423) (386)
Proceeds from the sale of treasury stock 126 82
------------------- -------------------
Net cash provided by financing activities 4,517 9,904
------------------- -------------------
Net increase in cash and cash equivalents 8,009 3,264
Cash and cash equivalents beginning of period 34,660 19,729
------------------- -------------------
Cash and cash equivalents end of period $42,669 $22,993
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $1,823 $2,154
Income taxes 39 34
Supplemental schedule of noncash investing activities:
Net reduction in loans resulting from the transfer to real estate owned $14 $--
Decrease in taxes payable due to exercise of non-qualified stock options 6 --
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 Company's consolidated financial position as of March 31,
2003 and December 31, 2002, and the results of operations and cash flows for
the three months ended March 31, 2003 and 2002. 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 2002 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 periods ended March 31, 2003 and 2002. (In
thousands, except per share amounts)
Weighted
Net Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
For the Three Months
Ended March 31, 2003:
Basic EPS $1,083 2,223 $0.49
=========
Dilutive Effect of Stock Options -- 7
----------- -------------
Diluted EPS $1,083 2,230 $0.49
=========== ============= =========
For the Three Months
Ended March 31, 2002:
Basic EPS $1,281 2,275 $0.56
=========
Dilutive Effect of Stock Options -- 34
----------- -------------
Diluted EPS $1,281 2,309 $0.55
=========== ============= =========
3. STOCK BASED COMPENSATION
The Company accounts for stock options in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees". Accordingly, compensation expense is recognized only if
the exercise price of the option is less than the fair value of the
underlying stock at the grant date. FASB Statement No. 123, "Accounting for
Stock-Based Compensation", encourages entities to recognize the fair value of
all stock-based awards on the date of grant as compensation expense over the
vesting period. Alternatively, Statement No. 123 allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma
disclosures of net income and earnings per share as if the fair-value-based
method defined in Statement No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by Statement No. 123.
On October 20, 1998, the Company's shareholders approved the CNB Bancorp,
Inc. Stock Option Plan (Stock Option Plan) which permits the issuance of
options to selected employees. The primary objective of the Stock Option Plan
is to provide employees with a proprietary interest in the Company and as an
incentive to encourage such persons to remain with the Company. On April 16,
2002, the Company's shareholders approved the Long-Term Incentive
Compensation Plan which provided the Company's Compensation Committee with
the authority to grant stock options to employees, non-employee directors and
consultants of the Company and its subsidiaries. Under the Stock Option Plan,
240,000 shares of authorized but unissued common stock are reserved for
issuance upon option exercises. Under the Long-Term Incentive Compensation
Plan, 225,000 shares of authorized but unissued common stock are reserved for
issuance upon option exercises. The Company also has the alternative to fund
both plans with treasury stock. Options under the plans may be either
non-qualified stock options or incentive stock options. Each option entitles
the holder to purchase one share of common stock at an exercise price equal
to the fair market value on the date of the grant. Options expire no later
than ten years following the date of the grant.
-4-
On June 26, 2001, 35,850 options were awarded at an exercise price of $32.50
per share. These options have a ten-year term with fifty percent vesting one
year from the date of the grant and the remaining fifty percent vesting two
years from the date of the grant. On June 24, 2002, 40,550 options were
awarded at an exercise price of $29.43 per share. These options have a
ten-year term with twenty-five percent vesting each year starting one year
from the date of the grant.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 2002 and 2001:
dividend yield of 2.41% and 2.11%, respectively; expected volatility of 15.8%
and 18.8%, respectively; risk free interest rate of 4.19% and 4.81%,
respectively; and an expected life of five years for grants awarded in both
years. Based on the aforementioned assumptions, the Company has estimated
that the fair value of the options granted on June 24, 2002 was $4.71 and the
options granted on June 26, 2001 was $6.60.
The Company applies APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company determined
compensation cost based on the estimated fair value at the grant date for its
stock options under Statement No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below
for the three month periods ended March 31, 2003 and 2002 (in thousands,
except per share data):
Three Months Three Months
Ending Ending
March 31, 2003 March 31, 2002
-------------- --------------
Net income:
As reported $1,083 $1,281
Deduct: Total stock-based
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (38) (42)
-------------- --------------
Pro forma net income $1,045 $1,239
============== ==============
Earnings per share:
Basic - as reported $0.49 $0.56
Basic - pro forma 0.47 0.54
Diluted - as reported 0.49 0.55
Diluted - pro forma 0.47 0.54
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
models, in management's opinion, do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
4. COMPREHENSIVE INCOME
The Company recorded total comprehensive income of $1,050,000 for the three
months ended March 31, 2003 as compared to total comprehensive income of
$781,000 for the three months ended March 31, 2002. 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 and minimum
pension liability adjustment.
5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". Statement No. 145 rescinds Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", which required
gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax
effect. Upon adoption of Statement No. 145, companies will be required to
apply the criteria in APB Opinion No. 30 in determining the classification of
gains and losses resulting from the extinguishment of debt. Additionally,
Statement No. 145 amends Statement No. 13, "Accounting for Leases", to
require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The provisions of Statement No. 145 related to
the rescission of Statement No. 4 are effective for fiscal years beginning
after May 15, 2002 and were adopted effective January 1, 2003. All other
provisions of Statement No. 145 are effective for transactions occurring
and/or financial statements issued on or after May 15, 2002. The adoption of
Statement No. 145 did not have any effect on the Company's consolidated
financial statements.
-5-
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". This statement is effective for exit or disposal activities
initiated after December 31, 2002. The Company will review the impact of
applying this standard to any exit or disposal activities initiated after
December 31, 2002.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions". This statement amends Statement No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions",
Statement No. 144, and FASB Interpretation No. 9. Except for transactions
between two or more mutual enterprises, this statement removes acquisitions
of financial institutions from the scope of both Statement No. 72 and FASB
Interpretation No. 9 and requires that those transactions be accounted for in
accordance with Statement No. 141 and Statement No. 142. In addition, this
statement amends Statement No. 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions. The
provisions of this statement are to be applied retroactively to January 1,
2002 and are effective after September 30, 2002. The adoption of this
pronouncement did not have any effect on the Company's consolidated financial
statements.
6. 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 2002 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.
7. GUARANTEES
The Company does not issue any guarantees that would require
liability-recognition or disclosure, other than its standby letters of
credit. Standby and other letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. Standby letters of credit generally arise in connection with lending
relationships. The credit risk involved in issuing these instruments is
essentially the same as that involved in extending loans to customers.
Contingent obligations under standby letters of credit totaled approximately
$256,000 at March 31, 2003 and represent the maximum potential future
payments the Company could be required to make. Typically, these instruments
have terms of twelve months or less and expire unused; therefore, the total
amounts do not necessarily represent future cash requirements. Each customer
is evaluated individually for creditworthiness under the same underwriting
standards used for commitments to extend credit and on-balance sheet
instruments. Company policies governing loan collateral apply to standby
letters of credit at the time of credit extension. Loan-to- value ratios are
generally consistent with loan-to-value requirements for other commercial
loans secured by similar types of collateral. The fair value of the Company's
standby letters of credit at March 31, 2003 was insignificant.
-6-
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 March 31, 2003 were $398.2 million, an increase of $6.4
million, or 1.6%, over the December 31, 2002 amount of $391.8 million. The
increase was primarily related to an increase in securities available for
sale of $2.9 million and an increase in cash and cash equivalents of $8.0
million. These increases were partially offset by a decrease in loans, net of
unearned discount, of $5.6 million. The asset growth was primarily financed
by deposit growth of $5.8 million.
Securities available for sale increased by $2.9 million, or 2.0%, from $144.2
million at December 31, 2002, to $147.1 million at March 31, 2003 primarily
as a result of the investment of available funds from deposit growth and the
decline in consumer lending.
Loans receivable, net of unearned income, decreased $5.6 million, or 3.0%
from $186.3 million at December 31, 2002 to $180.7 million at March 31, 2003.
The commercial portfolio increased by $0.5 million from December 31, 2002.
However, the consumer installment and residential mortgage portfolios were
down $2.9 million and $3.1 million, respectively. These decreases were due to
a decline in 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.
-7-
Cash and cash equivalents increased by $8.0 million, or 23.1%, from $34.7
million at December 31, 2002, to $42.7 million at March 31, 2003 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 three months of 2002.
Deposits at March 31, 2003 were $306.5 million, an increase of $5.8 million,
or 1.9%, over the balance of $300.6 million at December 31, 2002. This
increase is primarily attributed to the increase in regular savings accounts,
cash management accounts and certificates and time deposits of $100,000 or
more, partially offset by the decrease in NOW accounts and mortgage escrow
accounts.
Stockholders' equity increased to $37.4 million at March 31, 2003 from $36.9
million at December 31, 2002, an increase of 1.4%. This increase was
primarily due to the retention of earnings, less dividends paid, during thes
first three months of 2003 coupled with the decrease in the accumulated other
comprehensive income related to the securities available for sale portfolio
and the net treasury stock transactions.
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 negatively affected the
Company's or the subsidiary Bank's liquidity position in any material way
during the first three months of 2003. 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 three months of 2003 at 9.4%. The retention of earnings during the
first three months of 2003, less dividends paid and the net treasury stock
transactions as well as the decrease in accumulated other comprehensive
income caused this ratio to remain virtually unchanged from December 31,
2002.
The table below shows the Company's March 31, 2003 ratios, December 31, 2002
ratios and the current regulatory guideline ratios for classification as well
capitalized as established by the Federal Reserve Board.
Regulatory
March 31, 2003 December 31, 2002 Guidelines
-------------- ----------------- ----------
Tier 1 risk based capital
to net risk weighted assets 15.3% 14.9% 6.0%
Total risk based capital to
net risk weighted assets 16.6 16.2 10.0
Leverage ratio
(Tier 1/adjusted
total assets) 8.0 7.9 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 first quarter of 2003 decreased
$449,000 or 8.0% from the corresponding period in 2002, while total interest
expense decreased $293,000 or 13.9% from the corresponding period in 2002.
Net interest income decreased $156,000 or 4.4% from the corresponding period
of 2002. This decrease is primarily due to the decrease in average loans
outstanding of $11.2 million from the corresponding period in 2002 with the
funds being reinvested in lower yielding assets. As a result, the net
interest margin declined from 4.34% for the first quarter of 2002 to 3.88%
for the corresponding period of 2003.
-8-
The decrease in interest and fees on loans of $432,000 or 11.4% from the
corresponding period of 2002 is primarily due to the decline in interest
rates on the total loan portfolio of 47 basis points from 7.84% for the first
quarter of 2002 to 7.37% for the same period of 2003. This decrease was also
due to the decrease of $11.2 million in the average volume outstanding
compared to the same period of 2002.
The decrease in interest on the securities portfolio of $57,000 from the
corresponding period of 2002 is primarily due to the lower rates on the
overall securities portfolio as compared to the same period of 2002. The
fully tax effected yield declined 87 basis points from 5.96% for the first
quarter of 2002 to 5.09% for the first quarter of 2003.
The decrease in interest expense of $293,000 for the first quarter of 2003 as
compared to the same period of 2002 is primarily related to the overall
decrease in the average rates being paid in the first quarter of 2003 on all
deposit and borrowed fund categories as compared to the same period of 2002.
The average rate paid on interest-bearing liabilities for the first quarter
of 2003 was 2.22% as compared to 2.83% for the same period of 2002.
The provision for loan losses increased $75,000 from the corresponding period
in 2002 to $385,000. Net charge-offs increased to $79,000 in the current
quarter compared to $60,000 in the prior year period. The increase in the
provision primarily relates to one commercial loan relationship which was
moved to doubtful. Non-performing loans increased from $1,687,000 at December
31, 2002 to $2,435,000 at March 31, 2003, an increase of $748,000. This
increase primarily relates to one commercial loan relationship. The provision
in both quarters was deemed to be adequate based on the overall evaluation of
the allowance for loan losses as of March 31, 2003 and 2002. The allowance
for loan losses as a percent of net loans outstanding was 1.88% at March 31,
2003 as compared to 1.66% at December 31, 2002 and 1.41% at March 31, 2002.
Non-interest income increased $12,000 or 1.7% from the corresponding period
of 2002. This increase was primarily due to an increase in service charges on
deposit accounts.
Non-interest expense increased $133,000 or 6.4% from the corresponding period
of 2002. Increases in salaries and employee benefits, occupancy expense and
external data processing expense were partially offset by a decrease in other
expense. The higher salaries and employee benefits were due to normal salary
adjustments and increases in medical insurance expense and pension 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 lower professional fees and postage expense.
Net income decreased $198,000 or 15.5% as compared to the same period of
2002. This decrease was primarily due to the decrease in the net interest
income and the increases in the provision for loan losses and other expenses
more than offsetting the decline in the provision for income taxes.
-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 March 31,
2003 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 13,547 1.2%
+100 13,664 2.1
0 13,390 0.0
-100 12,910 (3.6)
-200 12,870 (3.9)
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 March 31,
2003, the subsidiary Bank was in a liability sensitive or "negative gap"
position which means that more liabilities are scheduled to mature or reprice
within the next year than assets. The cumulative interest rate sensitivity
gap as of March 31, 2003 was 2.31% 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 filing 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: May 12, 2003
-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 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 May 12, 2003
- -------------------------------------------------------------------
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 May 12, 2003
- ---------------------------------------------------------------------------
By /s/ George A. Morgan
- ---------------------------------------------------------------------------
George A. Morgan, Vice President, Secretary and Chief Financial Officer
-14-
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-