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, 2005 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 9, 2005
$2.50 par value 2,221,520
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, 2005 and 2004 1
Consolidated statements of financial
condition as of March 31, 2005
and December 31, 2004 2
Consolidated statements of cash flows
for the three months ended March 31, 2005 and 2004 3
Notes to consolidated interim financial statements 4 - 6
Item 2 Management's discussion and analysis of financial
condition and results of operations 7 - 10
Item 3 Quantitative and qualitative disclosures
about market risk 11
Item 4 Controls and procedures 12
PART II OTHER INFORMATION
Item 1 Legal proceedings - not applicable
Item 2 Unregistered sales of equity securities
and use of proceeds 13
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 14
Signatures 15
Exhibit Index 16
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2005 2004
------------------- -------------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,108 $2,882
Interest on federal funds sold 23 26
Interest on balances due from depository institutions 9 6
Interest on securities available for sale 1,781 1,781
Interest on investment securities 85 119
Dividends on FRB and FHLB stock 28 27
------------------- -------------------
Total interest and dividend income 5,034 4,841
INTEREST EXPENSE Interest on deposits:
Regular savings, NOW and money market accounts 410 284
Certificates and time deposits of $100,000 or more 161 162
Other time deposits 474 550
Interest on securities sold under agreements to repurchase 141 145
Interest on other borrowings 298 269
------------------- -------------------
Total interest expense 1,484 1,410
NET INTEREST INCOME 3,550 3,431
Provision for loan losses 70 150
------------------- -------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,480 3,281
OTHER INCOME
Income from fiduciary activities 46 44
Service charges on deposit accounts 200 185
Net gain/(loss) on sales or calls of securities 235 401
Insurance commissions 232 199
Other income 153 149
------------------- -------------------
Total other income 866 978
OTHER EXPENSES
Salaries and employee benefits 1,428 1,202
Occupancy expense, net 198 184
Furniture and equipment expense 129 107
External data processing expense 281 236
Other expense 660 566
------------------- -------------------
Total other expenses 2,696 2,295
------------------- -------------------
INCOME BEFORE INCOME TAXES 1,650 1,964
Provision for income taxes 456 587
------------------- -------------------
NET INCOME $1,194 $1,377
=================== ===================
Earnings per share
Basic $0.54 $0.62
Diluted 0.53 0.62
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, 2005 December 31, 2004
------------------------ ------------------------
ASSETS
Cash and cash equivalents:
Non-interest bearing $10,495 $9,580
Interest bearing deposits with banks 1,915 369
Federal funds sold 2,900 2,400
------------------------ ------------------------
Total cash and cash equivalents 15,310 12,349
Securities available for sale, at fair value 177,732 189,176
Investment securities, at cost
(approximate fair value at March 31, 2005 -
$8,059; at December 31, 2004 - $7,804) 7,898 7,587
Investments required by law, stock in Federal Home Loan
Bank of New York and Federal Reserve Bank of New York,
at cost 2,584 2,984
Loans 202,305 197,313
Unearned income (7,748) (8,778)
Allowance for loan losses (2,358) (2,331)
------------------------ ------------------------
Net loans 192,199 186,204
Premises and equipment, net 5,742 5,780
Accrued interest receivable 2,159 1,813
Goodwill 5,809 5,809
All other intangibles 1,090 1,135
Other assets 8,924 9,332
------------------------ ------------------------
Total assets $419,447 $422,169
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non-interest bearing) $42,517 $41,922
Regular savings, NOW and money market accounts 182,671 181,722
Certificates and time deposits of $100,000 or more 26,896 24,657
Other time deposits 85,769 83,333
------------------------ ------------------------
Total deposits 337,853 331,634
Securities sold under agreements to repurchase 10,217 12,891
Notes payable - Federal Home Loan Bank 29,631 35,652
Other liabilities 2,297 1,971
------------------------ ------------------------
Total liabilities 379,998 382,148
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 35,701 34,981
Accumulated other comprehensive (loss)/income (1,368) 10
Treasury stock, at cost; 180,175 shares at March 31, 2005 and
183,067 shares at December 31, 2004 (5,306) (5,392)
------------------------ ------------------------
Total stockholders' equity 39,449 40,021
------------------------ ------------------------
Total liabilities and stockholders' equity $419,447 $422,169
======================== ========================
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,
--------------------------------------------
2005 2004
------------------ ------------------
Cash flows from operating activities:
Net income $1,194 $1,377
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in interest receivable (346) (289)
Decrease/(increase) in other assets 1,433 (26)
Increase in other liabilities 326 861
Deferred income tax benefit (61) (62)
Depreciation and other amortization expense 159 132
Net increase in cash surrender value of bank-owned life insurance (59) (61)
Amortization of premiums/discounts on securities, net 119 289
Net gain on securities transactions (235) (401)
Provision for loan losses 70 150
------------------ ------------------
Net cash provided by operating activities 2,600 1,970
------------------ ------------------
Cash flows from investing activities:
Purchase of investment securities (409) (805)
Purchase of securities available for sale (5,116) (26,665)
Net redemption of FRB and FHLB stock 400 102
Proceeds from maturities, paydowns and calls of investment securities 96 196
Proceeds from maturities, paydowns and calls of
securities available for sale 9,062 15,616
Proceeds from sale of securities available for sale 5,360 16,726
Net increase in loans (6,094) (2,278)
Purchases of premises and equipment, net (74) (108)
------------------ ------------------
Net cash provided by investing activities 3,225 2,784
------------------ ------------------
Cash flows from financing activities:
Net increase/(decrease) in deposits 6,219 (3,469)
Decrease in securities sold under agreements to repurchase (2,674) (367)
Decrease in notes payable - Federal Home Loan Bank (6,021) (2,020)
Treasury stock purchased (8) -
Cash dividends paid on common stock (466) (442)
Proceeds from the sale of treasury stock 86 77
------------------ ------------------
Net cash used in financing activities (2,864) (6,221)
------------------ ------------------
Net increase/(decrease) in cash and cash equivalents 2,961 (1,467)
Cash and cash equivalents beginning of period 12,349 31,390
------------------ ------------------
Cash and cash equivalents end of period $15,310 $29,923
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $1,469 $1,433
Income taxes 46 -
Supplemental schedule of noncash investing activities:
Net reduction in loans resulting from the transfer to real estate owned 27 -
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 March 31,
2005 and December 31, 2004 and the results of operations for the three months
ended March 31, 2005 and 2004 and cash flows for the three months ended March
31, 2005 and 2004. 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 2004 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, 2005 and 2004. (In
thousands, except per share amounts)
Weighted
Net Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------- ------------------- -------------------
For the Three Months Ended March 31, 2005:
Basic EPS $1,194 2,220 $0.54
===================
Dilutive Effect of Stock Options - 14
------------------- -------------------
Diluted EPS $1,194 2,234 $0.53
=================== =================== ===================
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
=================== =================== ===================
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.
-4-
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. On October 26, 2004, 44,300
options were awarded at an exercise price of $26.325 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 2004, 2003 and 2002:
dividend yield of 3.09%, 2.84% and 2.41%, respectively; expected volatility
of 15.2%, 15.7% and 15.8%, respectively; risk free interest rate of 3.30%,
2.27% and 4.19%, 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 October
26, 2004 was $3.14, June 30, 2003 was $2.84 and June 24, 2002 was $4.71.
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, 2005 and 2004 (in thousands,
except per share data):
Three Months Ended
March 31
----------------------------------------------
2005 2004
------------------- -------------------
Net income:
As reported $1,194 $1,377
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (32) (28)
------------------- -------------------
Pro forma net income $1,162 $1,349
=================== ===================
Earnings per share:
Basic - as reported $0.54 $0.62
Basic - pro forma 0.52 0.61
Diluted - as reported 0.53 0.62
Diluted - pro forma 0.52 0.61
4. COMPREHENSIVE INCOME
The Company recorded a total comprehensive loss of $184,000 for the three
months ended March 31, 2005 as compared to total comprehensive income of
$1,932,000 for the three months ended March 31, 2004. 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 three month periods ended
March 31, 2005 and 2004 (in thousands):
2005 2004
------------------- -------------------
Net unrealized holding (losses)/gains arising during the
period, net of taxes of $787 in 2005 and ($510) in 2004 ($1,235) $800
Reclassification adjustment for net realized gains included in
income, net of taxes of $91 in 2005 and $156 in 2004 (143) (245)
------------------- -------------------
Other comprehensive (loss)/income ($1,378) $555
=================== ===================
-5-
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
----------------------------------------------
2005 2004
------------------- -------------------
Service cost $66 $60
Interest cost 79 76
Expected return on plan assets (90) (82)
Amortization of loss from earlier periods 18 16
Amortization of unrecognized prior service cost 4 4
------------------- -------------------
Net periodic pension cost $77 $74
=================== ===================
The Company expects to contribute $236,000 to its pension plan in June
2005. This is the total amount expected to be paid in 2005.
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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised) Share-Based Payment ("FAS 123(R)"), the
accounting standard requiring the expensing of stock options for public
companies. FAS 123(R) is now scheduled to be mandatory for public companies
at the beginning of the first fiscal year beginning after June 15, 2005. FAS
123(R) covers a broad range of stock-based compensation arrangements
including stock options, stock appreciation rights, restricted stock and
restricted stock units as well as employee stock purchase plans. FAS 123(R)
requires companies to expense share-based payments based on fair value as of
the date of the grant and requires all companies to expense stock options and
other awards. FAS 123(R) is not expected to have a material effect on the
Company's financial position or results of operations.
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
$345,000 at March 31, 2005 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, 2005 and December 31, 2004 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.
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 2004 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.
FINANCIAL REVIEW:
Financial Condition:
Total assets at March 31, 2005 were $419.4 million, a decrease of $2.5
million, or 0.6%, from the December 31, 2004 amount of $421.9
-7-
million. The decrease was primarily related to the Company reducing
securities sold under agreements to repurchase and notes payable with the
Federal Home Loan Bank by $8.7 million. Funds from maturing and sold
securities available for sale were used to reduce these borrowings and to
increase liquidity with additional cash and cash equivalents of $3.0 million.
Securities available for sale decreased $11.4 million from December 31, 2004.
There was also an increase in loans, net of unearned discount, of
approximately $6.0 million which was primarily funded with the growth in
deposits of $6.2 million. Stockholders' equity decreased $0.6 million from
$40.0 million at December 31, 2004 to $39.4 million at March 31, 2005. This
primarily relates to the after tax effect of the decline in the market value
of the available for sale securities of $1.4 million. This decline was
partially offset by retained earnings, net of dividends paid for the first
quarter of 2005.
Securities available for sale decreased $11.4 million, or 6.0%, from $189.2
million at December 31, 2004 to $177.7 million at March 31, 2005. The Company
sold approximately $5.4 million of available for sale securities during the
first quarter of 2005 to improve the Company's cash position and reduce
borrowings with the Federal Home Loan Bank and reduce securities sold under
agreement to repurchase. Maturing securities and cash flows from
mortgaged-backed securities were also used to reduce borrowings and provide
the Company with additional cash.
Loans receivable, net of unearned income, increased $6.0 million, or 3.2%
from $188.5 million at December 31, 2004 to $194.6 million at March 31, 2005.
Increases in commercial lending and mortgage lending were primarily
responsible for this growth while consumer installment lending showed a
slight decrease due to slow automobile sales at the Company's indirect auto
dealers.
Cash and cash equivalents increased by $3.0 million, or 24.0%, from $12.3
million at December 31, 2004, to $15.3 million at March 31, 2005 as the
Company retained cash to improve short term liquidity. The Company also
anticipates using some of this cash to reduce borrowings over the remainder
of the year.
The Company performed the goodwill impairment test during the first quarter
of 2005 and determined that no impairment loss was required to be recognized.
Deposits at March 31, 2005 were $337.9 million, an increase of $6.2 million,
or 1.9%, from the balance of $331.6 million at December 31, 2004. Demand
deposits increased $0.6 million and regular savings, NOW and money market
accounts increased $0.9 million. Certificates of deposit showed the largest
gain of $4.7 million as depositors are returning to certificates of deposit
as rates have been rising during the first quarter of 2005.
Stockholders' equity decreased by $0.6 million, or 1.4%, from $40.0 million
at December 31, 2004 to $39.4 million at March 31, 2005. The retention of
earnings for the first three months of 2005 was more than offset by the
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 three months of 2005. 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 slightly from 9.5% at December
31, 2004 to 9.4% at March 31, 2005. The decrease in total assets associated
with the sale of securities available for sale and the reduction in borrowed
funds combined with earnings during the first three months of 2005 over
dividends paid, net treasury stock transactions and the decrease in
accumulated other comprehensive income caused this ratio to decrease from
December 31, 2004.
-8-
The table below shows the Company's March 31, 2005 ratios, December 31, 2004
ratios and the current regulatory guideline ratios for classification as well
capitalized as established by the Federal Reserve Board.
Regulatory
March 31, 2005 December 31, 2004 Guidelines
-------------- ----------------- ----------
Tier 1 risk based capital to net risk weighted assets 15.5% 15.2% 6.0%
Total risk based capital to net risk weighted assets 16.6 16.3 10.0
Leverage ratio (Tier 1/adjusted total assets) 8.0 7.7 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 decreased $183,000 or 13.3% for the first quarter of 2005 as
compared to the same period of 2004. This decrease was primarily due to the
decrease in gains on sales of available for sale securities coupled with the
increase in total other expenses. An increase in the net interest income, a
reduction in the provision for loan losses and the provision for income taxes
offset some of the additional expenses and reduction in securities gains
during the first quarter of 2005. Net income for the first quarter was
negatively impacted by operating costs associated with the purchase of the
two branch offices from HSBC added to the Company on July 30, 2004.
Total interest and dividend income for the first quarter of 2005 increased
$193,000 or 4.0% from the corresponding period in 2004, while total interest
expense increased $74,000 or 5.2% from the corresponding period in 2004. Net
interest income increased $119,000 or 3.5% from the corresponding period of
2004. This increase is primarily due to the increase in volume of interest
earning assets over the comparable period of 2004 of $26.1 million. Lower
average rates on the interest earning assets coupled with higher rates on
interest-bearing liabilities caused the net interest margin to decreased from
4.01% for the first quarter of 2004 to 3.88% for the corresponding period of
2005. The decline in the net interest margin is expected to continue
throughout 2005 as interest-bearing liabilities continue to reprice more
rapidly than interest-earning assets.
The increase in interest and fees on loans of $226,000 or 7.8% from the
corresponding period of 2004 is primarily due to the increase in volume of
$19.3 million from the comparable period of 2004. Approximately $6.0 million
of this increase relates to the branches acquired from HSBC on July 30, 2004.
The average rate on the total loan portfolio decreased from 6.72% for the
first quarter of 2004 to 6.55% for the same period of 2005. This was
primarily due to new loans being booked in the consumer installment and
mortgage portfolios having lower rates, on average, than the existing average
rates on the runoff of these portfolios. This is expected to continue
throughout 2005.
The decrease in interest on the securities portfolio of $34,000 from the
corresponding period of 2004 is primarily due to the decrease in the average
tax effected yield on the overall securities portfolio of 42 basis points
from 4.81% for the first quarter of 2004 to 4.39% for the comparable period
of 2005. An increase in the average volume of $15.2 million offset most of
the effect of the decline in yield.
The increase in interest expense of $74,000 for the first quarter of 2005 as
compared to the same period of 2004 is primarily related to the increase in
interest bearing deposits of $18.4 million as compared to the first quarter
of 2004. An increase in rates on the floating rate borrowings with the
Federal Home Loan Bank that reprice monthly or quarterly to current LIBOR
rates was primarily responsible for the increase of 47 basis points in the
average rate paid on securities sold under agreements to repurchase and other
borrowings. The average rate increased from 3.61% for the first quarter of
2004 to 4.08% for the first quarter of 2005.
The provision for loan losses decreased $80,000 to $70,000 from the
corresponding period in 2004. Net charge-offs decreased $89,000 from the
prior year period decreasing from $132,000 in the first quarter of 2004 to
$43,000 in the first quarter of 2005. Non-performing loans decreased from
$720,000 at December 31, 2004 to $117,000 at March 31, 2005, a decrease of
$603,000. This decrease primarily relates to two commercial non-accrual loans
that were paid off during the first quarter of 2005. Based on our most recent
analysis of collateral and cash flow on the remaining non-performing loans 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,
2005 and 2004. The allowance for loan losses as a percent of net loans
outstanding was 1.21% at March 31, 2005, 1.24% at December 31, 2004 and 1.41%
at March 31, 2004.
Non-interest income decreased $112,000 or 11.5% from the corresponding period
of 2004. This decrease was primarily due to the decrease in gains on sales of
securities from the available for sale investment portfolio. This decrease
was partially offset by an increase in insurance commissions and service
charges on deposit accounts. The higher insurance commissions primarily
reflect higher contingency commissions related to the claims experience of
the insurance subsidiaries policy holders. The higher service
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charges on deposit accounts primarily reflects higher usage of the subsidiary
Bank's debit cards.
Non-interest expense increased $401,000 or 17.5% from the corresponding
period of 2004. 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 utilities 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 relates primarily to the
additional accounts acquired with the HSBC branch acquisition and the higher
volume of debit card transactions. Higher other expense primarily relates to
costs associated with preparing for Sarbanes-Oxley compliance. Non-interest
expense is expected to exceed 2004 levels for the remainder of 2005 as we
anticipate spending another $50,000 to $75,000 on Sarbanes-Oxley compliance
and the additional expenses associated with the new branches acquired from
HSBC BANK USA on July 30, 2004.
Provision for income taxes decreased $131,000 from the corresponding period
of 2004. This primarily relates to the decrease in income before taxes of
$314,000. The combined effective federal and state tax rate for the first
quarter of 2005 was 27.6% as compared to 29.9% for the corresponding period
of 2004. This decrease is primarily due to the percentage of taxable income
to total income decreasing primarily as a result of tax exempt municipal
income increasing from $363,000 for the first quarter of 2004 to $393,000 for
the first quarter of 2005.
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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,
2005 assuming the immediate increases or decreases in interest rates shown
below:
Change in Estimated Net Change in
Interest Rate Interest Income Net Interest
(basis points) ($000 omitted) Income
- -------------------- --------------------- ------------------
+200 13,171 (7.0)%
+100 13,714 (3.1)
0 14,160 0.0
-100 14,022 (1.0)
-200 13,687 (3.3)
Both up and down scenarios show a decline in the net interest income
primarily based on the subsidiary Bank's current position in callable
securities. In a declining rate environment these securities are quite often
called and the funds reinvested in lower yielding securities and in a rising
rate environment these securities do not get called so the funds do not
reprice as quickly as rates rise. The Company is currently repositioning the
investment portfolio into shorter maturities which react more favorably as
rates rise or fall.
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,
2005, 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, 2005 was 15.17% 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.
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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, 2005, 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, 2005, 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,
2005, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
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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
----------------- ----------------- ----------------- ---------------
January 1, 2005 to January 31, 2005 - $- - 83,447
February 1, 2005 to February 28, 2005 48 27.50 48 83,399
March 1, 2005 to March 31, 2005 234 27.27 234 83,165
----------------- ----------------- -----------------
TOTAL 282 $27.31 282
================= ================= =================
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.
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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.
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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 9, 2005
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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.
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