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 June 30, 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 August 11, 2003
$2.50 par value 2,211,823
CNB BANCORP, INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 Consolidated interim financial statements:
Consolidated statements of income for the three months ended
June 30, 2003 and 2002 and the six months ended June 30,
2003 and 2002 1
Consolidated statements of financial condition as of June 30,
2003 and December 31, 2002 2
Consolidated statements of cash flows for the six months
ended June 30, 2003 and 2002 3
Notes to consolidated interim financial statements 4 - 6
Item 2 Management's discussion and analysis of financial
condition and results of operations 7 - 10
Item 3 Quantitative and qualitative disclosures about market risk 11
Item 4 Controls and procedures 12
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 -
Annual Meeting 13
Item 5 Other information - none
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,210 $3,668 $6,568 $7,458
Interest on federal funds sold 41 55 80 108
Interest on balances due
from depository institutions 43 15 97 28
Interest on securities
available for sale 1,522 1,679 3,051 3,271
Interest on investment securities 122 137 267 276
Dividends on FRB and FHLB stock 43 34 88 66
Total interest and
dividend income 4,981 5,588 10,151 11,207
INTEREST EXPENSE
Interest on deposits:
Regular savings, NOW and
money market accounts 391 545 802 1,061
Certificates and time deposits
of $100,000 or more 218 206 449 453
Other time deposits 692 894 1,405 1,792
Interest on securities sold
under agreements to repurchase 149 150 297 299
Interest on other borrowings 311 323 624 622
Total interest expense 1,761 2,118 3,577 4,227
NET INTEREST INCOME 3,220 3,470 6,574 6,980
Provision for loan losses 135 225 520 535
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,085 3,245 6,054 6,445
OTHER INCOME
Income from fiduciary activities 62 59 102 102
Service charges on deposit accounts 187 153 349 292
Net gain on securities transactions 4 - 4 -
Insurance commissions 119 125 476 489
Other income 153 145 306 299
Total other income 525 482 1,237 1,182
OTHER EXPENSES
Salaries and employee benefits 1,181 1,062 2,366 2,125
Occupancy expense, net 132 130 287 255
Furniture and equipment expense 123 114 242 232
External data processing expense 208 245 466 450
Other expense 655 592 1,140 1,150
Total other expenses 2,299 2,143 4,501 4,212
INCOME BEFORE INCOME TAXES 1,311 1,584 2,790 3,415
Provision for income taxes 329 453 725 1,003
NET INCOME $982 $1,131 $2,065 $2,412
Earnings per share
Basic $0.44 $0.50 $0.93 $1.06
Diluted 0.44 0.49 0.93 1.05
See accompanying notes to consolidated interim financial statements
-1-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, 2003 December 31, 2002
ASSETS
Cash and cash equivalents:
Non-interest bearing $12,320 $11,252
Interest bearing 13,857 12,508
Federal funds sold 11,400 10,900
Total cash and cash equivalents 37,577 34,660
Securities available for sale,
at fair value 154,565 144,219
Investment securities, at cost
(approximate fair value at June 30, 2003 -
$10,660; at December 31, 2002 - $9,975) 10,200 9,569
Investments required by law, stock in
Federal Home Loan Bank of New York and
Federal Reserve Bank of New York, at cost 3,098 3,161
Loans 188,812 201,017
Unearned income (13,799) (14,753)
Allowance for loan losses (2,396) (3,083)
Net loans 172,617 183,181
Premises and equipment, net 5,150 3,996
Accrued interest receivable 1,868 1,801
Goodwill 3,960 3,960
Other assets 7,827 7,257
Total assets $396,862 $391,804
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non-interest bearing) $27,635 $27,827
Regular savings, NOW and
money market accounts 157,098 152,469
Certificates and time deposits of
$100,000 or more 31,134 29,663
Other time deposits 90,871 90,657
Total deposits 306,738 300,616
Securities sold under agreements
to repurchase 11,799 13,570
Notes payable - Federal Home Loan Bank 37,926 39,119
Other liabilities 2,231 1,615
Total liabilities 358,694 354,920
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 31,651 30,517
Accumulated other comprehensive income 1,614 1,299
Treasury stock, at cost;
185,289 shares at June 30, 2003 and
176,491 shares at December 31, 2002 (5,519) (5,354)
Total stockholders' equity 38,168 36,884
Total liabilities and
stockholders' equity $396,862 $391,804
See accompanying notes to consolidated interim financial statements
-2-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30,
2003 2002
Cash flows from operating activities:
Net income $2,065 $2,412
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in interest receivable (67) (145)
(Increase)/decrease in other assets (857) 57
Increase in other liabilities 616 202
Deferred income tax expense/(benefit) 196 (160)
Depreciation and other amortization expense 269 272
Net increase in cash surrender value of
bank-owned life insurance (134) (69)
Amortization of premiums/discounts on
securities, net 658 126
Net gain on securities transactions (4) -
Provision for loan losses 520 535
Total adjustments 1,197 818
Net cash provided by operating activities 3,262 3,230
Cash flows from investing activities:
Purchase of investment securities (1,844) (1,188)
Purchase of securities available for sale (68,109) (34,780)
Net redemption/(purchase) of FRB and
FHLB stock 63 (214)
Proceeds from maturities, paydowns and
calls of investment securities 1,207 1,247
Proceeds from maturities, paydowns and
calls of securities available for sale 57,631 26,231
Net decrease in loans 9,996 2,413
Purchases of premises and equipment, net (1,351) (267)
Net cash used by investing activities (2,407) (6,558)
Cash flows from financing activities:
Net increase in deposits 6,122 10,165
(Decrease)/increase in securities
sold under agreements to repurchase (1,771) 143
(Decrease)/increase in notes payable - FHLB (1,193) 4,317
Treasury stock purchased (497) (1,302)
Cash dividends paid on common stock (845) (772)
Proceeds from the sale of treasury stock 246 717
Net cash provided by financing activities 2,062 13,268
Net increase in cash and cash equivalents 2,917 9,940
Cash and cash equivalents beginning of period 34,660 19,729
Cash and cash equivalents end of period $37,577 $29,669
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $3,594 $4,315
Income taxes 889 1,220
Supplemental schedule of noncash investing
activities:
Net reduction in loans resulting from the
transfer to real estate owned $20 $80
Decrease in taxes payable due to exercise
of non-qualified stock options 15 47
See accompanying notes to consolidated interim financial statements
-3-
CNB BANCORP, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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 June 30,
2003 and December 31, 2002 and the results of operations for the three and
six months ended June 30, 2003 and 2002 and the changes in cash flows for the
six months ended June 30, 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 and six month periods ended June 30, 2003 and
2002. (In thousands, except per share amounts)
Weighted
Net Average
Income Shares Per Share
(Numerator) (Denominator) Amount
For the Three Months
Ended June 30, 2003:
Basic EPS $ 982 2,221 $0.44
Dilutive Effect of Stock Options - 6
Diluted EPS $ 982 2,227 $0.44
For the Three Months Ended
June 30, 2002:
Basic EPS $1,131 2,267 $0.50
Dilutive Effect of Stock Options - 35
Diluted EPS $1,131 2,302 $0.49
For the Six Months Ended
June 30, 2003:
Basic EPS $2,065 2,222 $0.93
Dilutive Effect of Stock Options - 7
Diluted EPS $2,065 2,229 $0.93
For the Six Months Ended
June 30, 2002:
Basic EPS $2,412 2,271 $1.06
Dilutive Effect of Stock Options - 34
Diluted EPS $2,412 2,305 $1.05
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.
-4-
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.
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. On June 30, 2003, 41,800 options were awarded at
an exercise price of $25.75 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 2003, 2002 and 2001:
dividend yield of 2.84%, 2.41% and 2.11%, respectively; expected volatility
of 15.7%, 15.8% and 18.8%, respectively; risk free interest rate of 2.27%,
4.19% and 4.81%, respectively; and an expected life of five years for grants
awarded in all three years. Based on the aforementioned assumptions, the
Company has estimated that the fair value of the options granted on June 30,
2003 was $2.84, June 24, 2002 was $4.71 and 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 and six month periods ended June 30, 2003 and 2002 (in
thousands, except per share data):
Three Months Ending Six Months Ending
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
Net income:
As reported $982 $1,131 $2,065 $2,412
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (38) (42) (76) (84)
Pro forma net income $944 $1,089 $1,989 $2,328
Earnings per share:
Basic - as reported $0.44 $0.50 $0.93 $1.06
Basic - pro forma 0.43 0.48 0.90 1.03
Diluted - as reported 0.44 0.49 0.93 1.05
Diluted - pro forma 0.42 0.47 0.89 1.01
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 $1,330,000 for the three
months ended June 30, 2003 as compared to total comprehensive income of
$2,552,000 for the three months ended June 30, 2002. For the six month
periods ended June 30, 2003 and 2002 the Company recorded total comprehensive
income of $2,380,000 and $3,333,000, 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 and minimum
pension liability adjustment.
-5-
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.
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
$231,000 at June 30, 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 June 30, 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 June 30, 2003 were $396.9 million, an increase of $5.1
million, or 1.3%, over the December 31, 2002 amount of $391.8 million. The
increase was primarily related to an increase in securities available for
sale of $10.3 million and an increase in cash and cash equivalents of $2.9
million. These increases were partially offset by a decrease in loans, net of
unearned discount, of $11.3 million. The asset growth was primarily financed
by deposit growth of $6.1 million.
Securities available for sale increased by $10.3 million, or 7.2%, from
$144.2 million at December 31, 2002, to $154.6 million at June 30, 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 $11.3 million, or 6.0%
from $186.3 million at December 31, 2002 to $175.0 million at June 30, 2003.
The commercial portfolio increased by $0.5 million from December 31, 2002.
However, the consumer installment and residential mortgage portfolios were
down $4.3 million and $7.5 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 $2.9 million, or 8.4%, from $34.7
million at December 31, 2002, to $37.6 million at June 30, 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 six months of 2003.
Premises and equipment, net increased by $1.2 million, or 28.9% from $4.0
million at December 31, 2002 to $5.2 million at June 30, 2003 primarily
related to the new branch office being constructed in Saratoga Springs, New
York. This new office is scheduled to open in the third quarter of 2003.
Deposits at June 30, 2003 were $306.7 million, an increase of $6.1 million,
or 2.0%, 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 $38.2 million at June 30, 2003 from $36.9
million at December 31, 2002, an increase of 3.5%. This increase was
primarily due to the retention of earnings, less dividends paid, during the
first six months of 2003 coupled with the increase in the accumulated other
comprehensive income related to the securities available for sale portfolio
and the decrease due to 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 six 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 increased from 9.4% at December 31, 2002
to 9.6% at June 30, 2003. The retention of earnings during the first six
months of 2003, less dividends paid and the net treasury stock transactions
as well as the increase in accumulated other comprehensive income caused this
ratio to increase from December 31, 2002.
The table below shows the Company's June 30, 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
June 30, 2003 December 31, 2002 Guidelines
Tier 1 risk based capital
to net risk weighted assets 15.6% 14.9% 6.0%
Total risk based capital to
net risk weighted assets 16.8 16.2 10.0
Leverage ratio (Tier 1/adjusted
total assets) 8.1 7.9 5.0
These ratios are well in excess of regulatory minimums.
-8-
Results of Operations:
Most Recent Quarter and Same Quarter in Preceding Year:
Total interest and dividend income for the second quarter of 2003 decreased
$607,000 or 10.9% from the corresponding period in 2002, while total interest
expense decreased $357,000 or 16.9% from the corresponding period in 2002. Net
interest income decreased $250,000 or 7.2% from the corresponding period of
2002. This decrease is primarily due to the decrease in average loans
outstanding of $14.2 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 4.20% for the second quarter of 2002 to 3.72% for the
corresponding period of 2003.
The decrease in interest and fees on loans of $458,000 or 12.5% from the
corresponding period of 2002 is primarily due to the decrease of $14.2
million in the average volume outstanding compared to the same period of
2002. The decrease in interest rates on the total loan portfolio of 42 basis
points from 7.59% for the second quarter of 2002 to 7.17% for the same period
of 2003 also contributed to the reduction in the loan portfolio income.
The decrease in interest on the securities portfolio of $172,000 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 113 basis points from 5.89% for the second
quarter of 2002 to 4.76% for the second quarter of 2003.
The decrease in interest expense of $357,000 for the second 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 second 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 second quarter
of 2003 was 2.13% as compared to 2.77% for the same period of 2002.
The provision for loan losses decreased $90,000 from the corresponding period
in 2002 to $135,000. Net charge-offs increased to $1,129,000 in the current
quarter compared to $189,000 in the prior year period. The increase in the
net charge-offs primarily relates to one commercial loan relationship which
was written down in the second quarter of 2003. Based on our most recent
analysis of collateral and cash flow, we believe the charge-off taken to date
on this relationship represents our best estimate of loss on this
relationship. Non-performing loans increased from $1,687,000 at December 31,
2002 to $1,892,000 at June 30, 2003, an increase of $205,000. This increase
primarily relates to the addition of one commercial loan relationship less
the write-down noted above. Based on our most recent analysis of collateral
and cash flow, we believe that the allowance for loan losses allocated to
this relationship is adequate. The provision in both quarters was deemed to
be adequate based on the overall evaluation of the allowance for loan losses
as of June 30, 2003 and 2002. The allowance for loan losses as a percent of
net loans outstanding was 1.37% at June 30, 2003 as compared to 1.66% at
December 31, 2002 and 1.45% at June 30, 2002.
Non-interest income increased $43,000 or 8.9% from the corresponding period
of 2002. This increase was primarily due to an increase in service charges on
deposit accounts.
Non-interest expense increased $156,000 or 7.3% from the corresponding period
of 2002. Increases in salaries and employee benefits and other expense were
partially offset by lower data processing expense. The higher salaries and
employee benefits were due to normal salary adjustments and increases in
medical insurance expense and pension expense. The higher other expense is
primarily related to stationery and supplies for the new document imaging
system put in place during the second quarter of 2003.
Net income decreased $149,000 or 13.2% as compared to the same period of
2002. This decrease was primarily due to the decrease in the net interest
income and the increase in the other expenses more than offsetting the
increase in other income and the decline in the provision for income taxes.
Most Recent Year to Date and Corresponding Year to Date Period:
Total interest and dividend income for the first six months of 2003 decreased
$1,056,000 or 9.4% from the corresponding period in 2002, while total
interest expense decreased $650,000 or 15.4% from the corresponding period in
2002. Net interest income decreased $406,000 or 5.8% from the corresponding
period of 2002. This decrease is primarily due to the decrease in average
loans outstanding of $12.7 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 4.26% for the first six months of 2002 to 3.79%
for the corresponding period of 2003.
The decrease in interest and fees on loans of $890,000 or 11.9% from the
corresponding period of 2002 is primarily due to the decrease of $12.7
million in the average volume outstanding compared to the same period of
2002. The decrease in interest rates on the total loan portfolio of 45 basis
points from 7.72% for the first six months of 2002 to 7.27% for the same
period of 2003 also contributed to the reduction in the loan portfolio
income.
-9-
The decrease in interest on the securities portfolio of $229,000 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 99 basis points from 5.91% for the first
six months of 2002 to 4.92% for the first six months of 2003. An increase of
approximately $20.9 million in the average volume in 2003 over the comparable
period of 2002 helped to defray some of the decline in interest income on the
securities portfolio.
The decrease in interest expense of $650,000 for the first six months 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 six months 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 six
months of 2003 was 2.18% as compared to 2.80% for the same period of 2002.
The provision for loan losses decreased $15,000 from the corresponding period
in 2002 to $520,000. Net charge-offs increased to $1,207,000 in the current
six month period compared to $248,000 in the prior year period. The increase
in the net charge-offs primarily relates to one commercial loan relationship
which was written down in the first six months of 2003. Based on our most
recent analysis of collateral and cash flow, we believe the charge-off taken
to date on this relationship represents our best estimate of loss on this
relationship. Non-performing loans increased from $1,687,000 at December 31,
2002 to $1,892,000 at June 30, 2003, an increase of $205,000. This increase
primarily relates to the addition of one commercial loan relationship less
the write-down noted above. Based on our most recent analysis of collateral
and cash flow, we believe that the allowance for loan losses allocated to
this relationship is adequate. The provision for both periods was deemed to
be adequate based on the overall evaluation of the allowance for loan losses
as of June 30, 2003 and 2002. The allowance for loan losses as a percent of
net loans outstanding was 1.37% at June 30, 2003 as compared to 1.66% at
December 31, 2002 and 1.45% at June 30, 2002.
Non-interest income increased $55,000 or 4.7% from the corresponding period
of 2002. This increase was primarily due to an increase in service charges
on deposit accounts.
Non-interest expense increased $289,000 or 6.9% from the corresponding period
of 2002. Increases in salaries and employee benefits and occupancy expense
were primarily responsible for this increase. The higher salaries and
employee benefits were due to normal salary adjustments and increases in
medical insurance expense and pension expense. The higher occupancy expense
is primarily related to utilities and building insurance.
Net income decreased $347,000 or 14.4% as compared to the same period of
2002. This decrease was primarily due to the decrease in the net interest
income and the increase in the other expenses more than offsetting the
increase in other income and the decline in the provision for income taxes.
-10-
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 June 30,
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 13,001 0.3%
+100 13,134 1.3
0 12,960 0.0
-100 12,817 (1.1)
-200 12,811 (1.1)
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 June 30,
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 June 30, 2003 was 5.01% 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.
-11-
CNB BANCORP, INC.
DISCLOSURE OF EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as
of June 30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of
June 30, 2003, 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 was no change in the Company's internal control over financial
reporting that occurred during the Company's fiscal quarter ended June 30,
2003, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
-12-
CNB BANCORP, INC.
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders - Annual Meeting
1. Election of Directors
At the annual meeting of shareholders held on April 15, 2003 there were
1,774,356 voting shares present in person or by proxy, which represented
79.81% of the Company's outstanding shares of 2,223,229. Shareholders of the
Company were asked to consider the Company's nominees for directors and to
elect three (3) directors, to serve for a term of three (3) years. The
Company's nominees for director were: John C. Miller, Robert L. Maider, and
Timothy E. Delaney, each of whom were elected. The results of shareholder
voting are as follows:
Director Votes For Votes Against
John C. Miller 1,764,215 10,141
Robert L. Maider 1,763,496 10,860
Timothy E. Delaney 1,764,326 10,030
Directors continuing in office are: George A. Morgan, Clark D. Subik,
Deborah H. Rose, Theodore E. Hoye III, William N. Smith, Brian K.
Hanaburgh and Richard D. Ruby. Frank E. Perrella retired effective April
15, 2003 having reached the mandatory retirement age of seventy-five.
-13-
CNB BANCORP, INC.
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)
31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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 - Filed April 29, 2003 - Board of Directors
approved additional buyback of common stock; Filed April 29, 2003 - The
company reported financial information and accompanying discussion for
the quarter ended March 31, 2003
-14-
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: August 11, 2003
-15-
CNB BANCORP, INC.
EXHBIT 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)
31.1 Certification pursuant to section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification pursuant to section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. section 1350, as
enacted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification pursuant to 18 U.S.C. section 1350, as
enacted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
-16-
Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) [This paragraph intentionally left blank.]
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 11, 2003 By /s/ William N. Smith
William N. Smith, Chairman, President and
Chief Executive Officer
Exhibit 31.2
CNB BANCORP, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) [This paragraph intentionally left blank.]
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 11, 2003 By /s/ George A. Morgan
George A. Morgan, Vice President, Secretary
and Chief Financial Officer
Exhibit 32.1
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 June 30, 2003 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
August 11, 2003
Exhibit 32.2
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 June 30, 2003 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
August 11, 2003