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, 2004 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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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 10, 2004
$2.50 par value 2,213,480
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, 2004 and 2003 1
Consolidated statements of financial condition
as of March 31, 2004 and December 31, 2003 2
Consolidated statements of cash flows for the
three months ended March 31, 2004 and 2003 3
Notes to consolidated interim financial statements 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, use of proceeds and issuer
purchases of equity securities - 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 12
Signatures 13
Exhibit Index 14
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------------------- -------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $2,882 $3,358
Interest on federal funds sold 26 39
Interest on balances due from depository institutions 6 54
Interest on securities available for sale 1,781 1,529
Interest on investment securities 119 145
Dividends on FRB and FHLB stock 27 45
-------------------- -------------------
Total interest and dividend income 4,841 5,170
INTEREST EXPENSE
Interest on deposits:
Regular savings, NOW and money market accounts 284 411
Certificates and time deposits of $100,000 or more 162 231
Other time deposits 550 713
Interest on securities sold under agreements to repurchase 145 148
Interest on other borrowings 269 313
-------------------- -------------------
Total interest expense 1,410 1,816
NET INTEREST INCOME 3,431 3,354
Provision for loan losses 150 385
-------------------- -------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,281 2,969
OTHER INCOME
Income from fiduciary activities 44 40
Service charges on deposit accounts 185 162
Net gain on sales or calls of securities 401 -
Insurance commissions 199 357
Other income 149 153
-------------------- -------------------
Total other income 978 712
OTHER EXPENSES
Salaries and employee benefits 1,202 1,185
Occupancy expense, net 184 155
Furniture and equipment expense 107 119
External data processing expense 236 258
Other expense 566 485
-------------------- -------------------
Total other expenses 2,295 2,202
-------------------- -------------------
INCOME BEFORE INCOME TAXES 1,964 1,479
Provision for income taxes 587 396
-------------------- -------------------
NET INCOME $1,377 $1,083
==================== ===================
Earnings per share
Basic $0.62 $0.49
Diluted 0.62 0.49
See accompanying notes to consolidated interim financial statements
-1-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands, except share data)
March 31, 2004 December 31, 2003
---------------- -------------------
ASSETS
Cash and cash equivalents:
Non-interest bearing $9,723 $12,272
Interest bearing deposits with banks 6,600 5,918
Federal funds sold 13,600 13,200
---------------- -------------------
Total cash and cash equivalents 29,923 31,390
Securities available for sale, at fair value 158,597 163,251
Investment securities, at cost (approximate fair value at March 31, 2004 -
$10,647; at December 31, 2003 - $10,030) 10,319 9,711
Investments required by law, stock in Federal Home Loan
Bank of New York and Federal Reserve Bank of New York,
at cost 2,887 2,989
Loans 186,693 185,147
Unearned income (13,326) (13,917)
Allowance for loan losses (2,436) (2,418)
---------------- -------------------
Net loans 170,931 168,812
Premises and equipment, net 5,771 5,765
Accrued interest receivable 2,098 1,809
Goodwill 3,960 3,960
Other assets 7,642 7,869
---------------- -------------------
Total assets $392,128 $395,556
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non-interest bearing) $31,050 $30,386
Regular savings, NOW and money market accounts 162,076 160,736
Certificates and time deposits of $100,000 or more 26,631 28,215
Other time deposits 85,021 88,910
---------------- -------------------
Total deposits 304,778 308,247
Securities sold under agreements to repurchase 11,757 12,124
Notes payable - Federal Home Loan Bank 33,716 35,736
Other liabilities 2,270 1,409
---------------- -------------------
Total liabilities 352,521 357,516
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 33,271 32,353
Accumulated other comprehensive income 1,530 975
Treasury stock, at cost; 189,404 shares at March 31, 2004 and
192,601 shares at December 31, 2003 (5,616) (5,710)
---------------- -------------------
Total stockholders' equity 39,607 38,040
---------------- -------------------
Total liabilities and stockholders' equity $392,128 $395,556
================ ===================
See accompanying notes to consolidated interim financial statements
-2-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
2004 2003
------------- -------------
Cash flows from operating activities:
Net income $1,377 $1,083
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in interest receivable (289) (470)
Increase in other assets (26) (143)
Increase in other liabilities 861 786
Deferred income tax benefit (62) (159)
Depreciation and other amortization expense 132 93
Net increase in cash surrender value of bank-owned life insurance (61) (67)
Amortization of premiums/discounts on securities, net 289 285
Net gain on securities transactions (401) -
Provision for loan losses 150 385
------------- -------------
Total adjustments 593 710
------------- -------------
Net cash provided by operating activities 1,970 1,793
------------- -------------
Cash flows from investing activities:
Purchase of investment securities (805) -
Purchase of securities available for sale (26,665) (29,045)
Net redemption/(purchase) of FRB and FHLB stock 102 (42)
Proceeds from maturities, paydowns and calls of investment securities 196 235
Proceeds from maturities, paydowns and calls of securities available for sale 15,616 25,825
Proceeds from sale of securities available for sale 16,726 -
Net (increase)/decrease in loans (2,278) 5,496
Purchases of premises and equipment, net (108) (770)
------------- -------------
Net cash provided by investing activities 2,784 1,699
------------- -------------
Cash flows from financing activities:
Net (decrease)/increase in deposits (3,469) 5,839
Decrease in securities sold under agreements to repurchase (367) (1,696)
(Decrease)/increase in notes payable - FHLB (2,020) 904
Treasury stock purchased - (233)
Cash dividends paid on common stock (442) (423)
Proceeds from the sale of treasury stock 77 126
------------- -------------
Net cash (used in)/provided by financing activities (6,221) 4,517
------------- -------------
Net (decrease)/increase in cash and cash equivalents (1,467) 8,009
Cash and cash equivalents beginning of period 31,390 34,660
------------- -------------
Cash and cash equivalents end of period $29,923 $42,669
============= =============
Supplemental disclosures of cash flow information: Cash paid
during the period:
Interest $1,433 $1,823
Income taxes - 39
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
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,
2004 and December 31, 2003 and the results of operations for the three months
ended March 31, 2004 and 2003 and cash flows for the three months ended March
31, 2004 and 2003. 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 2003 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, 2004 and 2003. (In
thousands, except per share amounts)
Weighted
Net Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------- -------------------- ------------------
For the Three Months Ended March 31, 2004:
Basic EPS $1,377 2,211 $0.62
==================
Dilutive Effect of Stock Options - 6
------------------- --------------------
Diluted EPS $1,377 2,217 $0.62
=================== ==================== ==================
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
=================== ==================== ==================
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 and FASB Statement No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure."
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
-4-
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-month periods ended March 31, 2004 and 2003 (in thousands,
except per share data):
Three Months Ended
March 31
-----------------------------------------------
2004 2003
------------------- --------------------
Net income:
As reported $1,377 $1,083
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (28) (38)
------------------- --------------------
Pro forma net income $1,349 $1,045
=================== ====================
Earnings per share:
Basic - as reported $0.62 $0.49
Basic - pro forma 0.61 0.47
Diluted - as reported 0.62 0.49
Diluted - pro forma 0.61 0.47
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 $1,932,000 for the three
months ended March 31, 2004 as compared to total comprehensive income of
$1,050,000 for the three months ended March 31, 2003. 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. PENSION BENEFITS
The following components of net periodic pension cost were recognized by the
Company in the accompanying consolidated statements of income:
Three Months Ended
March 31
-----------------------------------------------
2004 2003
------------------- --------------------
Service cost $60 $58
Interest cost 76 78
Expected return on plan assets (82) (76)
Amortization of loss from earlier periods 16 24
Amortization of unrecognized prior service cost 4 4
------------------- --------------------
Net periodic pension cost $74 $88
=================== ====================
-5-
The Company expects to contribute $241,000 to its pension plan in 2004.
The total amount is expected to be paid in June 2004.
6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued SFAS No. 132 (revised), "Employers'
Disclosures About Pensions and Other Postretirement Benefits". SFAS No. 132
(revised) prescribes employers' disclosures about pension plans and other
postretirement benefit plans, but does not change the measurement or
recognition of those plans. The statement retains and revises the disclosure
requirements contained in the original SFAS No. 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. SFAS No. 132 (revised) generally is effective
for fiscal years ending after December 15, 2003. The interim period
disclosures required by this statement are effective for interim periods
beginning after December 15, 2003. The Company's disclosures in note 11 of
the 2003 Annual Report incorporate the requirements of SFAS No. 132
(revised). The Company's disclosures in Note 5 of this Form 10-Q incorporate
the interim period disclosure requirements of SFAS No. 132 (revised).
7. 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 2003 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.
8. GUARANTEES
FASB Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others; an Interpretation of FASB Statements No. 5, 57, and
107 and rescission of FASB Interpretation No.34", requires certain
disclosures and liability-recognition for the fair value at issuance of
guarantees that fall within its scope. Under FIN No. 45, the Company does not
issue any guarantees that would require liability-recognition or disclosure,
other than its standby letters of credit. The Company has issued conditional
commitments in the form of standby letters of credit to guarantee payment on
behalf of a customer and 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
$125,000 at March 31, 2004 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, 2004 and December 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, 2004 were $392.1 million, a decrease of $3.4
million, or 0.9%, from the December 31, 2003 amount of $395.6 million. The
decrease was primarily related to a decrease in securities available for sale
of $4.7 million and a decrease in cash and cash equivalents of $1.5 million.
These decreases were partially offset by an increase in loans, net of
unearned discount, of $2.1 million and an increase in investment securities
of $0.6 million. The decrease in liabilities and stockholders' equity was
primarily related to a decline in deposits of $3.5 million and a reduction in
notes payable to the Federal Home Loan Bank of $2.0 million. This decrease
was partially offset by the retention of earnings less dividends paid and an
increase in accumulated other comprehensive income totaling $0.6 million.
Securities available for sale decreased by $4.7 million, or 2.9%, from $163.3
million at December 31, 2003, to $158.6 million at March 31, 2004 primarily
as a result of the Asset/Liability Management Committees' decision to sell a
portion of the Company's callable securities with maturities greater than
five years to shorten the overall average life of the securities portfolio in
anticipation of increasing interest rates.
-7-
Loans receivable, net of unearned income, increased $2.1 million, or 1.2%
from $171.2 million at December 31, 2003 to $173.4 million at March 31, 2004.
An increase in commercial lending was primarily responsible for this increase
in the loan portfolio.
Cash and cash equivalents decreased by $1.5 million, or 4.7%, from $31.4
million at December 31, 2003, to $29.9 million at March 31, 2004 primarily as
a result of the decrease in deposits and the reduction in notes payable with
the Federal Home Loan Bank.
Deposits at March 31, 2004 were $304.8 million, a decrease of $3.5 million,
or 1.1%, from the balance of $308.2 million at December 31, 2003. This
decrease is primarily attributed to the decrease in certificates and time
deposits of $100,000 or more and other time deposits totaling $5.5 million.
These decreases were partially offset by increases in demand deposits and
regular savings, NOW and money market accounts totaling $2.0 million.
Stockholders' equity increased to $39.6 million at March 31, 2004 from $38.0
million at December 31, 2003, an increase of 4.1%. This increase was
primarily due to the retention of earnings, less dividends paid, during the
first three months of 2004 and an increase in accumulated other comprehensive
income.
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 and 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 2004. 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 9.6% at December 31, 2003
to 10.1% at March 31, 2004. The decrease in total assets combined with
earnings during the first three months of 2004 over dividends paid, net
treasury stock transactions and the increase in accumulated other
comprehensive income caused this ratio to increase from December 31, 2003.
The table below shows the Company's March 31, 2004 ratios, December 31, 2003
ratios and the current regulatory guideline ratios for classification as well
capitalized as established by the Federal Reserve Board.
Regulatory
March 31, 2004 December 31, 2003 Guidelines
-------------- ----------------- ----------
Tier 1 risk based capital to net risk weighted assets 16.6% 16.2% 6.0%
Total risk based capital to net risk weighted assets 17.8 17.5 10.0
Leverage ratio (Tier 1/adjusted total assets) 8.6 8.3 5.0
These ratios for the Company, as well as the ratios for the subsidiary
Bank, are well in excess of regulatory minimums.
Results of Operations:
Most Recent Quarter and Same Quarter in Preceding Year:
Net income increased $294,000 or 27.1% for the first quarter of 2004 as
compared to the same period of 2003. This increase was primarily due to net
gains on sales of securities available for sale, a reduction in the provision
for loan losses and an increase in the net interest margin. A decline in
insurance commissions and a slight increase in operating expenses partially
offset these improvements to net income.
Total interest and dividend income for the first quarter of 2004 decreased
$329,000 or 6.4% from the corresponding period in 2003,
-8-
while total interest expense decreased $406,000 or 22.4% from the
corresponding period in 2003. Net interest income increased $77,000 or 2.3%
from the corresponding period of 2003. This increase is primarily due to the
decrease in the overall average rate paid on interest-bearing liabilities
exceeding the average rate earned on total earning assets by 17 basis points.
As a result, the net interest margin increased from 3.88% for the first
quarter of 2003 to 4.01% for the corresponding period of 2004.
The decrease in interest and fees on loans of $476,000 or 14.2% from the
corresponding period of 2003 is primarily due to the decrease of $11.5
million in the average volume outstanding compared to the same period of
2003. The decrease in interest rates on the total loan portfolio of 65 basis
points from 7.37% for the first quarter of 2003 to 6.72% for the same period
of 2004 also contributed to the reduction in the loan portfolio income.
The increase in interest on the securities portfolio of $226,000 from the
corresponding period of 2003 is primarily due to the increase in the average
volume on the overall securities portfolio of $25.2 million as compared to
the same period of 2003. A decrease in the fully tax effected yield of 28
basis points from 5.09% for the first quarter of 2003 to 4.81% for the first
quarter of 2004 partially offset some of this volume increase.
The decrease in interest expense of $406,000 for the first quarter of 2004 as
compared to the same period of 2003 is primarily related to the overall
decrease in the average rates being paid in the first quarter of 2004 on
virtually all deposit categories as compared to the same period of 2003. The
average rate paid on interest-bearing liabilities for the first quarter of
2004 was 1.75% as compared to 2.22% for the same period of 2003. A decrease
in the average volume of interest-bearing liabilities of $8.2 million also
contributed to the lower interest expense.
The provision for loan losses decreased $235,000 from the corresponding
period in 2003 to $150,000. Net charge-offs increased $53,000 from the prior
year period increasing from $79,000 in the first quarter of 2003 to $132,000
in the first quarter of 2004. Non-performing loans decreased from $1,647,000
at December 31, 2003 to $1,128,000 at March 31, 2004, a decrease of $519,000.
This decrease primarily relates to funds being received on two non-performing
commercial loan relationships. Based on our most recent analysis of
collateral and cash flow, we believe that the allowance for loan losses
allocated to these relationships 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 March 31, 2004 and 2003. The allowance for loan losses
as a percent of net loans outstanding was 1.41% at March 31, 2004 and
December 31, 2003 and 1.88% at March 31, 2003.
Non-interest income increased $266,000 or 37.4% from the corresponding period
of 2003. This increase was primarily due to net gains on sales of securities
available for sale and an increase in service charges on deposit accounts.
These increases were partially offset by a reduction in insurance commissions
at the insurance subsidiary. The lower commissions were primarily related to
a decline in the customer base and lower contingency commissions paid by the
insurance companies based on overall claims experience at the agency.
Non-interest expense increased $93,000 or 4.2% from the corresponding period
of 2003. Increases in salaries and employee benefits, occupancy expense and
other expense were responsible for this increase. The higher salaries and
employee benefits were due to normal salary adjustments and increases in
medical insurance premiums. The higher occupancy expenses were due to higher
depreciation expense on the new office in Saratoga Springs, New York, higher
real estate taxes, utilities and insurance on bank premises overall. The
higher other expense is primarily related to marketing being done in the
Saratoga Springs region in connection with our new office opened in September
2003.
Provision for income taxes increased $191,000 from the corresponding period
of 2003. This primarily relates to the increase in income before taxes of
$485,000. The combined effective federal and state tax rate for the first
quarter of 2004 was 29.9% as compared to 26.8% for the corresponding period
of 2003. This increase is primarily due to the percentage of taxable income
to total income increasing and the decline in tax exempt municipal bond
interest from $384,000 for the first quarter of 2003 to $363,000 for the
first quarter of 2004.
-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 operations. 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 100 and 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,
2004 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 12,992 (1.4)%
+100 13,291 0.9
0 13,170 0.0
-100 12,471 (5.3)
-200 12,247 (7.0)
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,
2004, 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, 2004 was 2.25% 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
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 March 31, 2004, 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
March 31, 2004, 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 March 31,
2004, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
-11-
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 February 3, 2004 - The company
reported financial information and accompanying discussion for the
quarter and year ended December 31, 2003
-12-
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 10, 2004
-13-
CNB BANCORP, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of CNB Bancorp, Inc.
(Incorporated by reference to the current report on
Form 8-K filed on August 10, 2001.)
3.2 Bylaws of CNB Bancorp, Inc.
(Incorporated by reference to the annual report on
Form 10-K filed on March 31, 1996.)
4. Instruments Defining the Rights of Security Holders.
(See Exhibits 3.1 and 3.2)
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.
-14-