UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 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 November 9, 2004
$2.50 par value 2,216,070
CNB BANCORP, INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 Consolidated interim financial statements (unaudited):
Consolidated statements of income for the
three months ended September 30, 2004 and 2003
and the nine months ended September 30, 2004 and 2003 1
Consolidated statements of financial condition
as of September 30, 2004 and December 31, 2003 2
Consolidated statements of cash flows for the
nine months ended September 30, 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 - 11
Item 3 Quantitative and qualitative disclosures
about market risk 12
Item 4 Controls and procedures 13
PART II OTHER INFORMATION
Item 1 Legal proceedings - not applicable
Item 2 Unregistered sales of equity securities
and use of proceeds 14
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 15
Signatures 16
Exhibit Index 17
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----------- --------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $2,915 $3,050 $8,654 $9,618
Interest on federal funds sold 38 33 90 113
Interest on balances due from depository institutions 31 23 46 120
Interest on securities available for sale 1,835 1,511 5,302 4,562
Interest on investment securities 108 118 338 385
Dividends on FRB and FHLB stock 24 14 70 102
----------- --------- ---------- ----------
Total interest and dividend income 4,951 4,749 14,500 14,900
INTEREST EXPENSE
Interest on deposits:
Regular savings, NOW and money market accounts 335 320 909 1,122
Certificates and time deposits of $100,000 or more 139 195 446 644
Other time deposits 464 648 1,478 2,053
Interest on securities sold under agreements
to repurchase 147 148 437 445
Interest on other borrowings 269 301 798 925
----------- --------- ---------- ----------
Total interest expense 1,354 1,612 4,068 5,189
NET INTEREST INCOME 3,597 3,137 10,432 9,711
Provision for loan losses 125 135 425 655
----------- --------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,472 3,002 10,007 9,056
OTHER INCOME
Income from fiduciary activities 44 41 133 143
Service charges on deposit accounts 207 187 576 536
Net gain/(loss) on sales or calls of securities (31) 26 416 30
Insurance commissions 170 204 589 680
Other income 151 157 425 463
----------- --------- ---------- ----------
Total other income 541 615 2,139 1,852
OTHER EXPENSES
Salaries and employee benefits 1,344 1,186 3,767 3,552
Occupancy expense, net 183 159 527 446
Furniture and equipment expense 135 103 363 345
External data processing expense 335 249 809 715
Other expense 634 597 1,758 1,737
----------- --------- ---------- ----------
Total other expenses 2,631 2,294 7,224 6,795
----------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,382 1,323 4,922 4,113
Provision for income taxes 357 325 1,381 1,050
----------- --------- ---------- ----------
NET INCOME $1,025 $998 $3,541 $3,063
=========== ========= ========== ==========
Earnings per share
Basic $0.46 $0.45 $1.60 $1.38
Diluted 0.46 0.45 1.60 1.37
See accompanying notes to consolidated interim financial statements
-1-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands, except share data)
September 30, 2004 December 31, 2003
------------------ -----------------
ASSETS
Cash and cash equivalents:
Non-interest bearing $11,567 $12,272
Interest bearing deposits with banks 9,752 5,918
Federal funds sold 14,600 13,200
------------------- -----------------
Total cash and cash equivalents 35,919 31,390
Securities available for sale, at fair value 186,163 163,251
Investment securities, at cost (approximate
fair value at September 30, 2004 -
$8,679; at December 31, 2003 - $10,030) 8,441 9,711
Investments required by law, stock in Federal Home Loan
Bank of New York and Federal Reserve Bank of New York,
at cost 2,735 2,989
Loans 194,452 185,147
Unearned income (9,881) (13,917)
Allowance for loan losses (2,515) (2,418)
------------------- -----------------
Net loans 182,056 168,812
Premises and equipment, net 5,844 5,765
Accrued interest receivable 2,200 1,809
Goodwill 5,809 3,960
All other intangibles 931 366
Other assets 8,075 7,503
------------------- -----------------
Total assets $438,173 $395,556
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non-interest bearing) $44,511 $30,386
Regular savings, NOW and money market accounts 194,735 160,736
Certificates and time deposits of $100,000 or more 26,493 28,215
Other time deposits 87,071 88,910
------------------- -----------------
Total deposits 352,810 308,247
Securities sold under agreements to repurchase 13,080 12,124
Notes payable - Federal Home Loan Bank 30,674 35,736
Other liabilities 1,726 1,409
------------------- -----------------
Total liabilities 398,290 357,516
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 34,471 32,353
Accumulated other comprehensive income 465 975
Treasury stock, at cost; 185,773 shares at September 30, 2004 and
192,601 shares at December 31, 2003 (5,475) (5,710)
------------------- -----------------
Total stockholders' equity 39,883 38,040
------------------- -----------------
Total liabilities and stockholders' equity $438,173 $395,556
=================== =================
See accompanying notes to consolidated interim financial statements
-2-
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $3,541 $3,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in interest receivable (391) (433)
Decrease/(Increase) in other assets 156 (375)
Increase in other liabilities 317 416
Deferred income tax (benefit)/expense (137) 150
Depreciation and other amortization expense 417 393
Net increase in cash surrender value of bank-owned life insurance (175) (199)
Amortization of premiums/discounts on securities, net 720 1,105
Net gain on securities transactions (416) (30)
Provision for loan losses 425 655
----------- -----------
Net cash provided by operating activities 4,457 4,745
----------- -----------
Cash flows from investing activities:
Net cash and cash equivalents provided by branch acquisitions 33,058 -
Purchase of investment securities (1,683) (2,518)
Purchase of securities available for sale (93,912) (97,481)
Net redemption of FRB and FHLB stock 254 66
Proceeds from maturities, paydowns and calls of investment securities 2,943 2,312
Proceeds from maturities, paydowns and calls of
securities available for sale 39,134 76,188
Proceeds from sale of securities available for sale 30,738 586
Net (increase)/decrease in loans (7,642) 13,863
Purchases of premises and equipment, net (385) (1,873)
----------- -----------
Net cash provided by/(used in) investing activities 2,505 (8,857)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 2,861 4,373
Increase/(decrease) in securities sold
under agreements to repurchase 956 (1,558)
Decrease in notes payable - FHLB (5,062) (1,291)
Treasury stock purchased (216) (969)
Cash dividends paid on common stock (1,327) (1,266)
Proceeds from the sale of treasury stock 355 431
----------- -----------
Net cash used in financing activities (2,433) (280)
----------- -----------
Net increase/(decrease) in cash and cash equivalents 4,529 (9,137)
Cash and cash equivalents beginning of period 31,390 34,660
----------- -----------
Cash and cash equivalents end of period $35,919 $25,523
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $4,101 $5,215
Income taxes 1,249 889
Supplemental schedule of noncash investing activities:
Fair value of assets acquired in branch acquisitions 6,796 -
Fair value of liabilities assumed in branch acquisitions 41,702 -
Excess of fair value of assets over liabilities acquired
in branch acquisitions (goodwill) 1,848 -
Net reduction in loans resulting from the transfer to real estate owned - 20
Decrease in taxes payable due to exercise of non-qualified stock options 12 15
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) and
its subsidiaries, which include 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 September
30, 2004 and December 31, 2003 and the results of operations for the three
and nine months ended September 30, 2004 and 2003 and cash flows for the nine
months ended September 30, 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 and nine month periods ended September 30, 2004 and
2003. (In thousands, except per share amounts)
Weighted
Net Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------ -----------
For the Three Months Ended September 30, 2004:
Basic EPS $1,025 2,216 $0.46
===========
Dilutive Effect of Stock Options - 6
------------- ------------
Diluted EPS $1,025 2,222 $0.46
============= ============ ===========
For the Three Months Ended September 30, 2003:
Basic EPS $ 998 2,212 $0.45
===========
Dilutive Effect of Stock Options - 16
------------- ------------
Diluted EPS $ 998 2,228 $0.45
============= ============ ===========
For the Nine Months Ended September 30, 2004:
Basic EPS $3,541 2,213 $1.60
===========
Dilutive Effect of Stock Options - 6
------------- ------------
Diluted EPS $3,541 2,219 $1.60
============= ============ ===========
For the Nine Months Ended September 30, 2003:
Basic EPS $3,063 2,219 $1.38
===========
Dilutive Effect of Stock Options - 10
------------- ------------
Diluted EPS $3,063 2,229 $1.37
============= ============ ===========
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
-4-
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 month and nine month periods ended September 30, 2004 and 2003
(in thousands, except per share data):
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
September 30 September 30
2004 2003 2004 2003
Net income:
As reported $1,025 $998 $3,541 $3,063
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (15) (28) (71) (104)
-------------- ------------ ------------ -----------
Pro forma net income $1,010 $970 $3,470 $2,959
============== ============ ============ ===========
Earnings per share:
Basic - as reported $0.46 $0.45 $1.60 $1.38
Basic - pro forma 0.46 0.44 1.57 1.33
Diluted - as reported 0.46 0.45 1.60 1.37
Diluted - pro forma 0.45 0.44 1.56 1.33
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 $2,234,000 for the three
months ended September 30, 2004 as compared to total comprehensive income of
$307,000 for the three months ended September 30, 2003. For the nine month
periods ended September 30, 2004 and 2003 the Company recorded total
comprehensive income of $3,031,000 and $2,687,000, 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 any minimum
pension liability adjustments. The Company's other comprehensive
income/(loss) consisted of the following for the nine month periods ended
September 30, 2004 and 2003 (in thousands):
-5-
2004 2003
Net unrealized holding losses
arising during the period, net
of taxes of $164 in 2004 and $221 in 2003 ($256) ($358)
Reclassification adjustment for
net realized gains included in
income, net of taxes of
$162 in 2004 and $12 in 2003 (254) (18)
------------ ------------
Other comprehensive loss ($510) ($376)
============ ============
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 Nine Months Ended
------------------------------ -----------------------------
September 30 September 30
2004 2003 2004 2003
Service cost $60 $57 $180 $173
Interest cost 75 77 226 233
Expected return on plan assets (82) (75) (246) (227)
Amortization of loss from earlier periods 16 23 49 71
Amortization of unrecognized prior service cost 4 5 12 13
------------- ------------ ------------ ------------
Net periodic pension cost $73 $87 $221 $263
============= ============ ============ ============
The Company contributed $241,000 to its pension plan in June 2004. This is
the total amount expected to be paid in 2004.
6. BRANCH ACQUISITION
On July 30, 2004, the subsidiary Bank acquired two branches from HSBC BANK
USA. These branches are located in Amsterdam, New York and Speculator, New
York. The acquisition was accounted for in accordance with FASB Statement No.
141, "Business Combinations". The purchase agreement called for a premium of
$2.4 million which will be amortized for tax purposes using the straight-line
method over fifteen years. At the time of the acquisition, the fair value of
assets acquired was $39.3 million and the fair value of liabilities assumed
was $41.7 million. The core deposit intangible portion of the purchase
premium was $0.6 million which will be amortized over eight years to expense
using the straight-line method. The remaining $1.8 million portion of the
purchase premium was considered to be goodwill which will be evaluated
annually to determine if any impairment loss is required to be recognized.
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
$289,000 at September 30, 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 September 30, 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, one branch located in the county of
Saratoga, one branch located in the county of Hamilton and one branch located
in the county of Montgomery. The subsidiary Insurance Agency has one office
located in the county of Fulton. The subsidiary Bank is a full service
commercial bank that offers a broad range of demand and time deposits;
consumer, mortgage, and commercial loans; and trust and investment services.
The subsidiary Bank is a member of the Federal Deposit Insurance Corporation
and the Federal Reserve System and is subject to regulation and supervision
of the Federal Reserve and the Comptroller of the Currency. The subsidiary
Insurance Agency offers a broad range of general insurance products and is
under the supervision of the State Insurance Department.
Except for historical information contained herein, the matters contained in
this review are "forward-looking statements" that involve risks and
uncertainties, including statements concerning future events or performance
and assumptions and other statements which are other than statements of
historical facts. The Company wishes to caution readers that the following
important factors, among others, could in the future affect the Company's
actual results and could cause the Company's actual results for subsequent
periods to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company herein:
* the effect of changes in laws and regulations, including federal and
state banking laws and regulations, with which the Company and its
banking subsidiary must comply, the cost of such compliance and the
potentially material adverse effects if the Company or its banking
subsidiary were not in substantial compliance either currently or in
the future as applicable;
* the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's organization,
compensation and benefit plans;
* the effect on the Company's competitive position within its market area
of increasing consolidation within the banking industry and increasing
competition from larger "super regional" and other banking
organizations as well as non-bank providers of various financial
services;
* the effect of unforeseen changes in interest rates and;
* the effects of changes in the business cycle and downturns in the local,
regional or national economies.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
cause the Company's actual results or circumstances for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL REVIEW:
Financial Condition:
Total assets at September 30, 2004 were $438.2 million, an increase of $42.6
million, or 10.8%, from the December 31, 2003 amount of $395.6 million. The
increase was primarily related to the acquisition of the two branches from
HSBC BANK USA on July 30, 2004 with deposits totaling approximately $41.7
million and loans, net of unearned discount, totaling approximately $6.0
million. The net cash received from HSBC on consummation of the purchase of
approximately $33.1 million has been used to increase securities available
for sale by approximately $22.9 million and to increase cash and cash
equivalents by approximately $4.5 million. Federal Home Loan Bank borrowings
have also been reduced by approximately $5.1 million. Goodwill and all other
intangibles also increased by approximately $2.4 million as a result of the
acquisition of the two branches from HSBC. There was also an increase in
loans, net of unearned discount, of approximately $7.3 million, an increase
in deposits of approximately $2.9 million and an increase in stockholders'
equity of approximately $1.8 million since December 31, 2003. The increase in
stockholders' equity is the result of the retention of earnings more than
offsetting dividends paid and the reduction in accumulated other
comprehensive income.
Securities available for sale increased by $22.9 million, or 14.0%, from
$163.3 million at December 31, 2003, to $186.2 million at September
-7-
30, 2004 primarily as a result of the Asset/Liability Management Committees'
decision to invest excess cash received from the HSBC acquisition in
available for sale securities with maturities or average lives of less than
five years. This was done in conjunction with sales in the first quarter and
the third quarter of securities with maturities or average lives of greater
than five years to shorten the overall average life of the securities
portfolio in anticipation of higher interest rates.
Loans receivable, net of unearned income, increased $13.3 million, or 7.8%
from $171.2 million at December 31, 2003 to $184.6 million at September 30,
2004. Increases in commercial lending, consumer installment lending and
mortgage lending all contributed to this increase as well as the $6.0 million
of loans purchased with the acquisition of the branches from HSBC.
Cash and cash equivalents increased by $4.5 million, or 14.4%, from $31.4
million at December 31, 2003, to $35.9 million at September 30, 2004
primarily as a result of the purchase of the branches from HSBC. The
subsidiary Bank expects to invest these additional funds in loans and
available for sale securities or to reduce Federal Home Loan Bank borrowings.
Goodwill and all other intangibles increased approximately $2.4 million, or
55.8% from $4.3 million at December 31, 2003 to $6.7 million at September 30,
2004. This increase was due to the premium paid on core deposits and goodwill
recognized in connection with the acquisition of the two branches from HSBC.
Deposits at September 30, 2004 were $352.8 million, an increase of $44.6
million, or 14.5%, from the balance of $308.2 million at December 31, 2003.
This increase is primarily attributed to the purchase of the two HSBC
branches with combined deposits of approximately $41.7 million. Demand
deposits increased $14.1 million and regular savings, NOW and money market
accounts increased $34.0 million. These increases were partially offset by a
decrease in certificates and time deposits of $100,000 or more and other time
deposits totaling $3.6 million.
Stockholders' equity increased by $1.8 million, or 4.8%, from $38.0 million
at December 31, 2003 to $39.9 million at September 30, 2004. The retention of
earnings for the first nine months of 2004 more than offset dividends paid
and a reduction 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 nine 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 decreased from 9.6% at December 31, 2003
to 9.1% at September 30, 2004. The increase in total assets associated with
the HSBC branches acquired combined with earnings during the first nine
months of 2004 over dividends paid, net treasury stock transactions and the
decrease in accumulated other comprehensive income caused this ratio to
decrease from December 31, 2003.
The table below shows the Company's September 30, 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
September 30, 2004 December 31, 2003 Guidelines
Tier 1 risk based capital
to net risk weighted assets 14.8% 16.2% 6.0%
Total risk based capital
to net risk weighted assets 16.0 17.5 10.0
Leverage ratio
(Tier 1/adjusted total assets) 7.8 8.3 5.0
-8-
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 $27,000 or 2.7% for the third quarter of 2004 as
compared to the same period of 2003. This increase was primarily due to the
increase in net interest income more than offsetting the increases in total
other expenses and the provision for income taxes. Net income for the third
quarter was negatively impacted by acquisition costs associated with the
purchase of the two branch offices from HSBC. Additional one time expenses
totaled approximately $175,000 primarily related to data processing
conversion costs, stationery and supplies and salaries and employee benefits.
Total interest and dividend income for the third quarter of 2004 increased
$202,000 or 4.3% from the corresponding period in 2003, while total interest
expense decreased $258,000 or 16.0% from the corresponding period in 2003.
Net interest income increased $460,000 or 14.7% 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 decrease in
the average rate earned on total earning assets by 30 basis points. As a
result, the net interest margin increased from 3.66% for the third quarter of
2003 to 3.96% for the corresponding period of 2004. The increase in the
average volume of earning assets over interest bearing liabilities of $10.0
million also helped to improve the net interest margin.
The decrease in interest and fees on loans of $135,000 or 4.4% from the
corresponding period of 2003 is primarily due to the decrease in interest
rates on the total loan portfolio of 58 basis points from 7.03% for the third
quarter of 2003 to 6.45% for the same period of 2004. The increase of $7.5
million in the average volume outstanding compared to the same period of 2003
helped to offset the decline in the average rate earned for the period.
The increase in interest on the securities portfolio of $314,000 from the
corresponding period of 2003 is primarily due to the increase in the average
volume of the overall securities portfolio of $16.9 million as compared to
the same period of 2003. An increase in the fully tax effected yield of 30
basis points from 4.41% for the third quarter of 2003 to 4.71% for the third
quarter of 2004 also contributed to the increase in interest on the
securities portfolio.
The decrease in interest expense of $258,000 for the third 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 third 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 third quarter of
2004 was 1.60% as compared to 1.95% for the same period of 2003. An increase
in the average volume of interest-bearing liabilities of $9.1 million offset
some of the savings created by the lower interest rates.
The provision for loan losses decreased $10,000 to $125,000 from the
corresponding period in 2003. Net charge-offs decreased $51,000 from the
prior year period decreasing from $119,000 in the third quarter of 2003 to
$68,000 in the third quarter of 2004. Non-performing loans decreased from
$1,647,000 at December 31, 2003 to $254,000 at September 30, 2004, a decrease
of $1,393,000. This decrease primarily relates to partial paydowns on two
non-performing commercial loans and the sale of one non-accrual loan
resulting in a net recovery of a previous partial charge off. One commercial
loan was also partially charged off during the period. 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 September 30, 2004 and 2003. The
allowance for loan losses as a percent of net loans outstanding was 1.36% at
September 30, 2004, 1.41% at December 31, 2003 and 1.41% at September 30,
2003.
Non-interest income decreased $74,000 or 12.0% from the corresponding period
of 2003. This decrease was primarily due to a decrease in insurance
commissions and net losses as compared to net gains in the previous year
comparable period on sales of securities available for sale. These decreases
were partially offset by an increase in service charges on deposit accounts.
The lower insurance commissions were primarily related to the loss of
commercial accounts at the insurance company subsidiary. The lower other
income reflects lower earnings on the cash surrender value of bank owned life
insurance and lower income on the sale of mutual funds.
Non-interest expense increased $337,000 or 14.7% from the corresponding
period of 2003. Increases in salaries and employee benefits, occupancy
expense, furniture and equipment expense and external data processing expense
were primarily a result of the acquisition of the two HSBC branches on July
30, 2004. The higher salaries and employee benefits were also due to normal
salary adjustments, higher pension expense 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 and rent expense associated with the two new branches acquired from
HSBC. The higher furniture and equipment expense relates to higher
depreciation expense, higher maintenance contracts and higher overall
equipment maintenance expense. The higher external data processing expense
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relates primarily to the account conversion costs associated with the HSBC
branch acquisitions.
Provision for income taxes increased $32,000 from the corresponding period of
2003. This primarily relates to the increase in income before taxes of
$59,000. The combined effective federal and state tax rate for the third
quarter of 2004 was 25.8% as compared to 24.6% for the corresponding period
of 2003. This increase is primarily due to the percentage of taxable income
to total income increasing coupled with the slight increase in tax exempt
municipal bond interest from $368,000 for the third quarter of 2003 to
$372,000 for the third quarter of 2004 which partially offset some of this
increase.
Most Recent Year to Date and Corresponding Year to Date Period:
Net income increased $478,000 or 15.6% 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 net interest income. These increases were partially offset by an
increase in other expenses, partially related to the branches acquired from
HSBC, and an increase in the provision for income taxes.
Total interest and dividend income for the first nine months of 2004
decreased $400,000 or 2.7% from the corresponding period in 2003, while total
interest expense decreased $1,121,000 or 21.6% from the corresponding period
in 2003. Net interest income increased $721,000 or 7.4% 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 decrease in the average rate earned on total earning assets by 26 basis
points. As a result, the net interest margin increased from 3.75% for the
first nine months of 2003 to 3.99% for the corresponding period of 2004.
The decrease in interest and fees on loans of $964,000 or 10.0% from the
corresponding period of 2003 is primarily due to the decrease in interest
rates on the total loan portfolio of 59 basis points from 7.19% for the first
nine months of 2003 to 6.60% for the same period of 2004. A decrease of $3.5
million in the average volume outstanding also contributed to the reduction
in the loan portfolio income.
The increase in interest on the securities portfolio of $693,000 or 14.0%
from the corresponding period of 2003 is primarily due to the increase in the
average volume on the overall securities portfolio of $18.8 million as
compared to the same period of 2003. A decrease in the fully tax effected
yield of 2 basis points from 4.74% for the first nine months of 2003 to 4.72%
for the first nine months of 2004 partially offset some of this volume
increase.
The decrease in interest expense of $1,121,000 or 21.6% for the first nine
months of 2004 as compared to the same period of 2003 is primarily related to
the overall decrease in the average rates being paid during the first nine
months 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 nine months of 2004 was 1.66% as compared to 2.10% for the same period
of 2003. A decrease in the average volume of interest-bearing liabilities of
$3.7 million also contributed to the lower interest expense.
The provision for loan losses decreased $230,000 to $425,000 from the
corresponding period in 2003. Net charge-offs decreased $998,000 from the
prior year period decreasing from $1,326,000 in the first nine months of 2003
to $328,000 in the first nine months of 2004. Non-performing loans decreased
from $1,647,000 at December 31, 2003 to $254,000 at September 30, 2004, a
decrease of $1,393,000. This decrease primarily relates to partial paydowns
on two non-performing commercial loans and the sale of one non-accrual loan
resulting in a net recovery of a previous partial charge off. One commercial
loan was also partially charged off during the period. 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 nine month periods was deemed to be adequate based on the overall
evaluation of the allowance for loan losses as of September 30, 2004 and
2003. The allowance for loan losses as a percent of net loans outstanding was
1.36% at September 30, 2004, 1.41% at December 31, 2003 and 1.41% at
September 30, 2003.
Non-interest income increased $287,000 or 15.5% from the corresponding period
of 2003. This increase was primarily due to an increase in 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
income from fiduciary activities, insurance commissions and other income. The
higher service charges on deposit accounts primarily relates to an increase
in overdraft charges and an increase in the monthly charges on checking
accounts. The lower insurance commissions are due to a decline in the
customer base and lower contingency commissions paid by the insurance
companies based on overall claims experience at the agency. The lower
fiduciary fees relate to one time fees received in 2003. The lower other
income primarily relates to lower income from the subsidiary Bank's
investment in a title company.
Non-interest expense increased $429,000 or 6.3% from the corresponding period
of 2003. Increases in salaries and employee benefits, occupancy expense and
external data processing expense were mainly responsible for this increase in
other non-interest expense. The higher salaries and employee benefits were
due to normal salary adjustments, increases in medical insurance premiums and
the additional staff expense associated with the acquisition of the two
branch offices from HSBC on July 30, 2004. The higher occupancy
-10-
expenses were due to higher depreciation expense on the new office in
Saratoga Springs, New York, higher real estate taxes, insurance premiums on
bank premises overall and lease expense associated with the two new branches
acquired from HSBC. The higher external data processing expense relates
primarily to testing, setup and implementation expenses related to the two
new branches acquired in the third quarter of 2004. Other expense was also
slightly higher due to stationery and supplies purchased in conjunction with
the branch acquisition.
Provision for income taxes increased $331,000 or 31.5% from the corresponding
period of 2003. This primarily relates to the increase in income before taxes
of $809,000. The combined effective federal and state tax rate for the first
nine months of 2004 was 28.1% as compared to 25.5% 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 $1,132,000 for the first nine months of 2003 to $1,101,000
for the first nine months of 2004.
-11-
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 September
30, 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 14,009 (4.2)%
+100 14,449 (1.2)
0 14,619 0.0
-100 13,788 (5.7)
-200 13,313 (8.9)
Another tool used to measure interest rate sensitivity is the cumulative gap
analysis. The cumulative gap represents the net position of assets and
liabilities subject to repricing in specified time periods. Deposit accounts
without specified maturity dates are modeled based on historical run-off
characteristics of these products in periods of rising rates. As of September
30, 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 September 30, 2004 was 5.26% 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.
-12-
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 September 30, 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
September 30, 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 September
30, 2004, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
-13-
CNB BANCORP, INC.
PART II
Item 2. Unregistered sales of equity securities and use of proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of Publicly May Yet Be
Total Number Average Announced Purchased
of Shares Price Paid Plans or Under the Plans
Purchased per Share Programs or Programs
------------- ------------- ------------ ----------------
July 1, 2004 to July 31, 2004 804 $24.74 804 85,728
August 1, 2004 to August 31, 2004 - - - 85,728
September 1, 2004 to September 30, 2004 1,920 26.00 1,920 83,808
------------- ------------- ------------
TOTAL 2,724 $25.63 2,724
============= ============= ============
The current common stock buyback program was approved by the Company's Board
of Directors effective June 1, 2003 for a period of two years, to expire on
June 1, 2005. The total number of shares authorized to be purchased under the
plan is 110,820.
-14-
CNB BANCORP, INC.
PART II
Item 6. 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.
-15-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CNB BANCORP, INC.
By /s/ William N. Smith
--------------------------------------------
William N. Smith, Chairman of the Board,
President and Chief Executive Officer
(chief executive officer)
By /s/ George A. Morgan
--------------------------------------------
George A. Morgan, Vice President and
Secretary
(principal financial and accounting officer)
Dated: November 9, 2004
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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.
-17-