UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 2000 Commission File Number: 0-17501
CNB BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 14-1709485
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
10-24 North Main Street, P.O. Box 873, Gloversville, New York, 12078
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 773-7911
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding in each Issuer's classes of common
stock, as of the latest practicable date:
Number of Shares Outstanding
Class of Common Stock as of July 25, 2000
$2.50 par value 2,368,186
<PAGE>
CNB BANCORP, INC. AND SUBSIDIARY
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1 Consolidated interim financial
statements (unaudited):
Consolidated statements of income for the three
months ending June 30, 2000 and 1999
and the six months ending June 30, 2000 and 1999 1
Consolidated statements of financial condition
as of June 30, 2000 and December 31, 1999 2
Consolidated statements of cash flows for the
six months ending June 30, 2000 and 1999 3
Notes to consolidated interim financial statements
(unaudited) 4 - 5
Item 2 Management's discussion and analysis
Item 3 Quantitative and qualitative disclosures about market risk
PART II OTHER INFORMATION
Item 1 Legal proceedings - none
Item 2 Changes in securities - none
Item 3 Defaults upon senior securities - none
Item 4 Submission of matters to a vote of security holders - none
Item 5 Other information - none
Item 6 (a) Exhibits - not applicable
(b) Reports on Form 8-K - June 8, 2000 - Acquisition of
Hathaway Agency, Inc.
<PAGE>
<TABLE>
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(UNAUDITED)
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 3,814 $ 2,964 $ 7,499 $ 5,562
Interest on federal funds sold 95 132 181 258
Interest on balances due from depository institutions 36 59 54 61
Interest and dividends on securities available for sale 1,772 1,371 3,431 2,698
Interest on investment securities 192 212 385 457
Dividends on FRB and FHLB stock 52 16 84 33
------- ------- ------- -------
Total interest and dividend income 5,961 4,754 11,634 9,069
INTEREST EXPENSE
Interest on deposits:
Certificates and time deposits of $100,000 or more 872 566 1,652 1,046
Regular savings, NOW and money market accounts 708 491 1,384 916
Other time deposits 1,072 891 2,130 1,676
Interest on securities sold under agreements to repurchase 109 166 243 331
Interest on other borrowed money 206 82 333 144
------- ------- ------- -------
Total interest expense 2,967 2,196 5,742 4,113
NET INTEREST INCOME 2,994 2,558 5,892 4,956
Provision for loan losses 62 60 99 120
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,932 2,498 5,793 4,836
NON-INTEREST INCOME
Income from fiduciary activities 42 38 81 77
Service charges on deposit accounts 114 100 223 189
Net gain on sale of securities 0 70 0 70
Other income 215 148 412 300
------- ------- ------- -------
Total non-interest income 371 356 716 636
NON-INTEREST EXPENSE
Salaries and employee benefits 883 747 1,746 1,406
Occupancy expense, net 105 81 230 175
Furniture and equipment expense 106 131 204 215
External data processing expense 178 251 355 433
Other expense 651 530 1,245 951
------- ------- ------- -------
Total non-interest expense 1,923 1,740 3,780 3,180
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,380 1,114 2,729 2,292
Applicable income taxes 407 312 816 659
------- ------- ------- -------
NET INCOME $ 973 $ 802 $ 1,913 $ 1,633
======= ======= ======= =======
Earnings per share
Basic $ 0.41 $ 0.33 $ 0.80 $ 0.68
Diluted 0.40 0.33 0.79 0.68
</TABLE>
Per share data has been adjusted to reflect the 3 for 2 stock split effected
through the 50% stock dividend declared in July 1999.
See accompanying notes to consolidated interim financial statements
-1-
<PAGE>
<TABLE>
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(UNAUDITED)
<CAPTION>
6/30/00 12/31/99
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Non-interest bearing $ 7,053 $ 12,402
Interest bearing 250 2,128
Federal funds sold 5,500 5,300
--------- ---------
Total cash and cash equivalents 12,803 19,830
Securities available for sale, at fair value 108,823 93,849
Investment securities (approximate fair value at June 30, 2000 -
$13,299; at December 31, 1999 - $13,611) 13,168 13,443
Investments required by law, stock in Federal Home Loan
Bank of New York and Federal Reserve Bank of New York,
at cost 1,988 1,988
Loans 193,705 183,785
Unearned income (12,799) (11,372)
Allowance for loan losses (2,772) (2,697)
--------- ---------
Net loans 178,134 169,716
Premises and equipment, net 3,417 3,550
Accrued interest receivable 2,091 1,745
Other assets 10,990 10,787
--------- ---------
Total assets $ 331,414 $ 314,908
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non interest bearing) $ 30,210 $ 25,671
Regular savings, NOW and money market accounts 108,365 121,717
Certificates and time deposits of $100,000 or more 50,876 35,339
Other time deposits 81,449 82,353
--------- ---------
Total deposits 270,900 265,080
Securities sold under agreements to repurchase 6,982 9,581
Notes payable - Federal Home Loan Bank 20,509 8,173
Other liabilities 1,285 789
--------- ---------
Total liabilities 299,676 283,623
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value, 5,000,000 shares authorized,
2,401,695 shares issued at June 30, 2000 and December 31, 1999 6,004 6,004
Surplus 4,415 4,415
Undivided profits 24,243 23,048
Accumulated other comprehensive loss (1,979) (2,182)
Treasury stock, at cost; 33,509 shares at June 30, 2000 (945) 0
--------- ---------
Total stockholders' equity 31,738 31,285
--------- ---------
Total liabilities and stockholders' equity $ 331,414 $ 314,908
========= =========
</TABLE>
Share amounts have been adjusted to reflect the 3 for 2 stock split effected
through the 50% stock dividend declared in July 1999.
See accompanying notes to consolidated interim financial statements
-2-
<PAGE>
<TABLE>
CNB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<CAPTION>
6 MONTHS ENDED
JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,913 $ 1,633
Adjustments to reconcile net income to net cash provided by operating activities:
(Increase) decrease in interest receivable (346) 122
Increase in other assets (265) (370)
Increase in other liabilities 496 252
Deferred income tax expense (benefit) 39 (113)
Depreciation and amortization expense 395 231
Net increase in cash surrender value of bank-owned life insurance (56) (51)
Amortization of premiums/discounts on securities, net 37 112
Net gain on sale of securities 0 (70)
Provision for loan losses 99 120
-------- --------
Total adjustments 399 233
-------- --------
Net cash provided by operating activities 2,312 1,866
-------- --------
Cash flows from investing activities:
Purchase of investment securities (1,286) (988)
Purchase of AFS securities (25,398) (15,669)
Purchase of FRB and FHLB stock 0 (100)
Proceeds from maturities, paydowns and calls of investment securities 1,929 4,209
Proceeds from maturities, paydowns and calls of AFS securities 9,358 16,259
Proceeds from sale of AFS securities 993 3,880
Net increase in loans (8,785) (2,615)
Purchases of premises and equipment, net (44) (129)
Net cash paid in acquisition 0 (10,636)
-------- --------
Net cash used by investing activities (23,233) (5,789)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 5,820 (2,238)
Decrease in securities sold under agreement to repurchase (2,599) (71)
Increase in notes payable - FHLB 12,336 2,000
Treasury stock purchased (945) 0
Cash dividends paid on common stock (718) (704)
-------- --------
Net cash provided (used) by financing activities 13,894 (1,013)
-------- --------
Net decrease in cash and cash equivalents (7,027) (4,936)
Cash and cash equivalents beginning of period 19,830 20,364
-------- --------
Cash and cash equivalents end of period $ 12,803 $ 15,428
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 5,469 $ 3,889
Income taxes 951 510
Supplemental schedule of noncash investing activities:
Net reduction in loans resulting from the transfer to real estate owned 209 176
Fair value of non-cash assets acquired in acquisition
Fair value of liabilities assumed in acquisition 0 $ 64,944
Fair value of stock options issued in acquisition 0 59,151
0 393
</TABLE>
See accompanying notes to consolidated interim financial statements
-3-
<PAGE>
CNB BANCORP, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of CNB Bancorp, Inc. (the Company)
and City National Bank and Trust Company (subsidiary Bank) conform to
generally accepted accounting principles in a consistent manner and are in
accordance with the general practices within the banking industry. Amounts
in the prior periods' consolidated financial statements are reclassified,
whenever necessary, to conform to the presentation in the current period's
consolidated financial statements.
In the opinion of CNB Bancorp, Inc., the accompanying unaudited
consolidated financial statements contain all adjustments necessary to
present fairly the consolidated financial position as of June 30, 2000 and
December 31, 1999 and the results of operations for the three and six
months ended June 30, 2000 and 1999 and the changes in cash flows for the
six months ended June 30, 2000 and 1999. 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 1999
Annual Report and Form 10-K.
2. EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings per
common share (EPS) for the three month and six month periods ended June
30, 2000 and 1999. Per share figures and weighted average shares
outstanding have been adjusted to reflect the 3 for 2 stock split effected
through the 50% stock dividend declared in July 1999. (In thousands,
except per share amounts)
<TABLE>
<CAPTION>
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
<S> <C> <C> <C>
For the Three Months Ended June 30, 2000:
Basic EPS $ 973 2,386 $ 0.41
========
Dilutive Effect of Stock Options 0 27
------ ------
Diluted EPS $ 973 2,413 $ 0.40
====== ====== ========
For the Three Months Ended June 30, 1999:
Basic EPS $ 802 2,400 $ 0.33
========
Dilutive Effect of Stock Options 0 21
------ ------
Diluted EPS $ 802 2,421 $ 0.33
====== ====== ========
For the Six Months Ended June 30, 2000:
Basic EPS $1,913 2,393 $ 0.80
========
Dilutive Effect of Stock Options 0 29
------ ------
Diluted EPS $1,913 2,422 $ 0.79
====== ====== ========
For the Six Months Ended June 30, 1999:
Basic EPS $1,633 2,400 $ 0.68
========
Dilutive Effect of Stock Options 0 17
------ ------
Diluted EPS $1,633 2,417 $ 0.68
====== ====== ========
</TABLE>
3. COMPREHENSIVE INCOME
The Company recorded total comprehensive income of $1,008,000 for the
three months ended June 30, 2000 as compared to a total comprehensive loss
of $313,000 for the three months ended June 30, 1999. For the six month
periods ended June 30, 2000 and 1999 the Company recorded total
comprehensive income of $2,116,000 and $176,000, respectively. At the
Company, comprehensive income(loss) 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. The following summarizes the components of other comprehensive
income(loss) for the six month periods ending June 30 (in thousands):
-4-
<PAGE>
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Unrealized gains (losses) on securities:
Net unrealized holding gains (losses) arising during the period,
net of taxes of ($129) in 2000 and $941 in 1999 $ 203 ($1,415)
Reclassification adjustment for net realized gains included in income,
net of taxes of $0 in 2000 and ($28) in 1999 0 42
------- -------
Other comprehensive income (loss), net of taxes of ($129) in 2000 and
$913 in 1999 $ 203 ($1,457)
======= =======
</TABLE>
4. ACQUISITION
On July 1, 2000, the Company acquired Hathaway Agency, Inc. (Hathaway), a
local insurance agency. At the date of the acquisition, Hathaway had
approximately $1,300,000 in assets, $300,000 in liabilities and
$1,000,000 in shareholders' equity. Pursuant to the merger agreement,
Hathaway became a wholly owned subsidiary of CNB Bancorp, Inc.
Upon consummation of the acquisition, each preferred share of Hathaway was
exchanged for $100 in cash which totaled approximately $700,000 and each
common share of Hathaway was exchanged for $2,432 in cash which totaled
approximately $600,000. In addition, under a non-compete agreement each
preferred and common shareholder of Hathaway will receive payments over
a period of five years totaling, in the aggregate, approximately
$300,000.
The acquisition was accounted for using purchase accounting in accordance
with APB Opinion No. 16, "Business Combinations" (APB No. 16). Under
purchase accounting, the purchase price is allocated to the respective
assets acquired and liabilities assumed based on their estimated fair
values. The acquisition of Hathaway resulted in approximately $300,000
in excess of cost over net assets acquired ("goodwill"). Goodwill is
being amortized to expense over a period of fifteen years using the
straight-line method. Covenant not to compete payments are being
expensed as paid over the five year period of the covenant.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. During the second quarter of 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" which deferred the effective date of SFAS No. 133 by one year from
fiscal quarters of fiscal years beginning after June 15, 1999 to fiscal
quarters of fiscal years beginning after June 15, 2000. Management is
currently evaluating the impact of this Statement on the Company's
consolidated financial statements.
-5-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
CNB BANCORP, INC.
July 25, 2000 By /s/ William N. Smith
--------------------------- --------------------------------
Date William N. Smith
Chairman of the Board, President
and Chief Executive Officer
July 25, 2000 By /s/ George A. Morgan
--------------------------- --------------------------------
Date George A. Morgan
Vice President and Secretary
(Principal Financial Officer)
<PAGE>
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 bank holding company headquartered in Gloversville, New
York. Its wholly-owned subsidiary, City National Bank and Trust Company (the
subsidiary Bank), was organized in 1887 and is also headquartered in
Gloversville, New York, with five branches located in the county of Fulton
and one branch located in the county of Saratoga. 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.
Except for historical information contained herein, the matters
contained in this review are "forward-looking statements" that involve risk
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;
* 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:
Acquisitions:
On June 1, 1999, the Company acquired Adirondack Financial Services
Bancorp, Inc. (Adirondack) and its wholly owned subsidiary, Gloversville
Federal Savings and Loan Association. At the date of the merger, Adirondack
and its subsidiary had approximately $68.5 million in assets, $56.4 million
in deposits and $9.5 million in shareholders' equity. Pursuant to the merger
agreement, Adirondack was merged into CNB Bancorp, Inc. and Gloversville
Federal Savings and Loan Association was merged into City National Bank and
Trust Company. The combined bank now operates as one institution under the
name of City National Bank and Trust Company.
On July 1, 2000, the Company acquired Hathaway Agency, Inc. (Hathaway),
a local insurance agency. At the date of the acquisition, Hathaway had
approximately $1,300,000 in assets, $300,000 in liabilities and $1,000,000 in
shareholders' equity. Pursuant to the merger agreement, Hathaway became a
wholly owned subsidiary of CNB Bancorp, Inc.
Upon consummation of the acquisition, each preferred share of Hathaway
was exchanged for $100 in cash which totaled approximately $700,000 and each
common share of Hathaway was exchanged for $2,432 in cash which totaled
approximately $600,000. In addition, under a non-compete agreement each
preferred and common shareholder of Hathaway will receive payments over a
period of five years totaling, in the aggregate, approximately $300,000.
-1-
<PAGE>
The acquisition was accounted for using purchase accounting in
accordance with APB Opinion No. 16, "Business Combinations" (APB No. 16).
Under purchase accounting, the purchase price is allocated to the respective
assets acquired and liabilities assumed based on their estimated fair values.
The acquisition of Hathaway resulted in approximately $300,000 in excess of
cost over net assets acquired ("goodwill"). Goodwill is being amortized to
expense over a period of fifteen years using the straight-line method.
Covenant not to compete payments are being expensed as paid over the five
year period of the covenant.
Financial Condition:
Total assets at June 30, 2000 were $331.4 million an increase of $16.5
million, or 5.2%, over the December 31, 1999 amount of $314.9 million. The
increases were primarily related to loan growth of $8.5 million and
investments available for sale of $15.0 million, partially offset by a $7.0
million decrease in cash and cash equivalents. Asset growth was financed by
deposit growth of $5.8 million and increased Federal Home Loan Bank
borrowings of $12.3 million.
Non-interest bearing cash balances decreased to $7.1 million at June 30,
2000 from $12.4 million at December 31, 1999 due primarily to the reduction
in vault cash that had been accumulated for any Year 2000 related needs.
Interest bearing cash balances decreased to $0.3 million at June 30, 2000
from $2.1 million at December 31, 1999 due primarily to temporary deposits at
year end being invested in the bond portfolio.
Securities available for sale increased by $15.0 million, from $93.8
million at December 31, 1999, to $108.8 million at June 30, 2000 primarily as
a result of the reduction of cash held at year end being invested in the bond
portfolio coupled with deposit growth and increased borrowings from the
Federal Home Loan Bank.
Loans receivable, net of unearned income, increased $8.5 million, or
4.9%, from $172.4 million at December 31, 1999, to $180.9 million at June 30,
2000, due primarily to the increase of $5.7 million in the commercial loan
portfolio and the increase of $4.0 million in the consumer installment loan
portfolio.
Deposits at June 30, 2000 were $270.9 million an increase of $5.8
million, or 2.2%, over the balance of $265.1 million at December 31, 1999.
This increase is primarily attributed to the increase in demand deposits and
large municipal certificates of deposit, partially offset by the decrease in
regular savings, NOW and money market deposits.
Stockholders' equity increased to $31.7 million at June 30, 2000 from
$31.3 million at December 31, 1999, an increase of 1.4%. This increase was
primarily due to the retention of earnings, less dividends paid, during the
first six months of 2000 less the cost of the purchase of 33,509 shares of
stock which were placed into treasury.
Liquidity:
There have been no trends or demands that have affected the Company's or
the subsidiary Bank's liquidity position in any material way during the first
six months of 2000. Funds from repayment of loans, maturing investment
securities and securities available for sale are available to satisfy any
normal needs that may arise.
Capital Resources:
Stockholders' equity to total assets decreased during the first six months
of 2000 from 9.9% at December 31, 1999 to 9.6% at June 30, 2000. This
decrease was primarily due to the growth in assets of $16.5 million or 5.2%
during the first six months while stockholders' equity increased $0.4 million
or 1.3%.
The table below shows the Company's June 30, 2000 ratios, December 31,
1999 ratios and the current regulatory guideline ratios for classification as
well capitalized as established by the Federal Reserve Board.
<TABLE>
<CAPTION>
Regulatory
06/30/00 12/31/99 Guidelines
-------- -------- ----------
<S> <C> <C> <C>
Tier 1 risk based capital to net risk weighted assets 16.1% 17.4% 4.0%
Total risk based capital to net risk weighted assets 17.3 18.7 8.0
Leverage ratio (Tier 1/adjusted total assets) 8.9 9.3 3.0
</TABLE>
These strong ratios are well in excess of regulatory minimums.
-2-
<PAGE>
Results of Operations:
Most Recent Quarter and Same Quarter in Preceding Year:
Total interest and dividend income for the second quarter of 2000
increased $1,207,000 or 25.4% from the corresponding period in 1999, while
total interest expense increased $771,000 or 35.1% from the corresponding
period in 1999. Net interest income increased $436,000 or 17.0% from the
prior year period resulting primarily from volume increases in interest
earning assets and interest bearing liabilities related to the acquisition of
Adirondack on June 1, 1999 and other growth in interest earning assets and
interest bearing liabilities as compared to the second quarter of 1999.
The increase in interest and fees on loans of $850,000 compared to the
second quarter of 1999 is largely due to the acquisition of approximately
$50.0 million in loans in the Adirondack purchase on June 1, 1999. Commercial
loan and consumer loan balances have also increased over the same period of
1999.
The increase in interest on securities available for sale of $401,000 is
largely due to an increase of $20.2 million in the average outstanding
balance of available for sale securities compared to the second quarter of
1999. The increase is largely attributed to securities acquired from
Adirondack totaling $12 million as well as the Company's strategy of
deploying excess cash in to the securities available for sale portfolio.
The decrease in interest income on federal funds sold is primarily
attributed to the decrease in the average outstanding balance of $4.9 million
from the second quarter of 1999 to the second quarter of 2000.
The increase in interest expense is primarily related to the increased
balance of interest bearing liabilities associated with the acquisition of
Adirondack on June 1, 1999. Additional interest expense resulted from the
increase in the average balance of certificates of deposit over $100,000 of
$12.5 million as compared to the second quarter of 1999.
The provision for loan losses increased $2,000 from the corresponding
period in 1999 to $62,000. Net charge-offs decreased $17,000 to $18,000 from
the prior year period. Non-performing loans decreased from $1,615,000 at
December 31, 1999 to $1,254,000 at June 30, 2000, a decrease of $361,000. The
provision was deemed to be adequate based on the overall evaluation of the
allowance for loan losses as of June 30, 2000. The allowance for loan losses
as a percent of net loans outstanding was 1.53% at June 30, 2000 as compared
to 1.56% at December 31, 1999.
Non-interest income increased $15,000 or 4.2% from the corresponding
period of 1999. This increase was primarily due to the increase in deposit
account service charges and increases in service fees collected on merchant
credit card sales partially offset by a gain on securities sales in 1999.
Non-interest expense increased $183,000 or 10.5% from the corresponding
period of 1999 due primarily to higher salaries and employee benefits, higher
occupancy expense and higher other expenses. The higher salaries and employee
benefits were primarily attributed to the addition of two new offices as of
June 1, 1999 with the acquisition of Gloversville Federal Savings and Loan
Association and normal salary adjustments. The higher occupancy expense
relates primarily to the two additional offices as a result of the
acquisition of Gloversville Federal. Higher other expense is primarily due to
the amortization of goodwill associated with the purchase of Adirondack.
Other increases were in advertising and telephone expense primarily
associated with the two additional offices. Credit card processing expenses
also increased in relation to the increase in other income discussed above.
These increases were partially offset by a reduction in data processing
expense and furniture and equipment expense related to the merger in 1999.
Net income increased $171,000 or 21.3% as compared to the same period of
1999. This increase was primarily due to the increase in net interest income
more than offsetting the increase in non-interest expense.
Most Recent Year to Date and Corresponding Year to Date Period:
Total interest and dividend income for the first six months of 2000
increased $2,565,000 or 28.3% from the corresponding period in 1999, while
total interest expense increased $1,629,000 or 39.6% from the corresponding
period in 1999. Net interest income increased $936,000 or 18.9% from the
prior year period resulting primarily from volume increases in interest
earning assets and interest bearing liabilities related to the acquisition of
Adirondack on June 1, 1999 and other growth in interest earning assets and
interest bearing liabilities as compared to the first six months of 1999.
The increase in interest and fees on loans of $1,937,000 compared to the
first six months of 1999 is largely due to the acquisition of
-3-
<PAGE>
approximately $50.0 million in loans in the Adirondack purchase on June 1,
1999. Commercial loan and consumer loan balances have also increased over the
same period of 1999.
The increase in interest on securities available for sale of $733,000 is
largely due to the increase of $19.2 million in the average outstanding
balance of available for sale securities compared to the first six months of
1999. The increase is largely attributed to securities acquired from
Adirondack totaling $12 million as well as the Company's strategy of
deploying excess cash in to the securities available for sale portfolio.
The decrease in interest income on federal funds sold is primarily
attributed to the decrease in the average outstanding balance of $4.8 million
from the first six months of 1999 to the first six months of 2000.
The increase in interest expense is primarily related to the increased
balance of interest bearing liabilities associated with the acquisition of
Adirondack on June 1, 1999. Additional interest expense resulted from the
increase in the average balance of certificates of deposit over $100,000 of
$14.5 million as compared to the first six months of 1999.
The provision for loan losses decreased $21,000 from the corresponding
period in 1999 to $99,000. Net charge-offs decreased $60,000 to $23,000 from
the prior year period. Non-performing loans decreased from $1,615,000 at
December 31, 1999 to $1,254,000 at June 30, 2000, a decrease of $361,000. The
provision was deemed to be adequate based on the overall evaluation of the
allowance for loan losses as of June 30, 2000. The allowance for loan losses
as a percent of net loans outstanding was 1.53% at June 30, 2000 as compared
to 1.56% at December 31, 1999.
Non-interest income increased $80,000 or 12.6% from the corresponding
period of 1999. This increase was primarily due to the increase in deposit
account service charges and increases in service fees collected on merchant
credit card sales partially offset by a gain on securities sales in 1999.
Non-interest expense increased $600,000 or 18.9% from the corresponding
period of 1999 due primarily to higher salaries and employee benefits, higher
occupancy expense and higher other expenses. The higher salaries and employee
benefits were primarily attributed to the addition of two new offices as of
June 1, 1999 with the acquisition of Gloversville Federal Savings and Loan
Association and normal salary adjustments. The higher occupancy expense
relates primarily to the two additional offices as a result of the
acquisition of Gloversville Federal. Higher other expense is primarily due to
the amortization of goodwill associated with the purchase of Adirondack.
Other increases were in advertising, stationary and supplies and telephone
expense primarily associated with the two additional offices. Credit card
processing expenses also increased in relation to the increase in other
income discussed above. These increases were partially offset by a reduction
in data processing expense and furniture and equipment expense related to the
merger in 1999.
Net income increased $280,000 or 17.1% as compared to the same period of
1999. This increase was primarily due to the increase in net interest income
and non-interest income more than offsetting the increase in non-interest
expense.
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<PAGE>
CNB BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and interest rates. The subsidiary Bank's market risk arises primarily from
interest rate risk inherent in its lending and deposit taking activities.
Although the subsidiary Bank manages other risks, such as credit and
liquidity risk, in the normal course of its business, management considers
interest rate risk to be its most significant market risk and could
potentially have the largest material effect on the subsidiary Bank's
financial condition and results of operation. The subsidiary Bank does not
currently have a trading portfolio or use derivatives to manage market and
interest rate risk.
The subsidiary Bank's interest rate risk management is the
responsibility of the Asset/Liability Management Committee (ALCO), which
reports to the Board of Directors. The ALCO, comprised of senior management,
has developed policies to measure, manage and monitor interest rate risk.
Interest rate risk arises from a variety of factors, including differences in
the timing between the contractual maturity or repricing of the subsidiary
Bank's assets and liabilities. For example, the subsidiary Bank's net
interest income is affected by changes in the level of market interest rates
as the repricing characteristics of its loans and other assets do not
necessarily match those of its deposits, other borrowings and capital.
In managing exposure, the subsidiary Bank uses interest rate sensitivity
models that measure both net gap exposure and earnings at risk. The ALCO
monitors the volatility of its net interest income by managing the
relationship of interest rate sensitive assets to interest rate sensitive
liabilities. The ALCO utilizes a simulation model to analyze net income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both an immediate 200 basis point rise or fall in
interest rates over a twelve month period. The model is based on the actual
maturity and repricing characteristics of interest rate assets and
liabilities. The model incorporates assumptions regarding the impact of
changing interest rates on the prepayment rate of certain assets and
liabilities.
The following table shows the approximate effect on the subsidiary
Bank's annualized net interest income as of June 30, 2000 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 11,184 (4.2)%
+100 11,415 (2.2)
0 11,675 0.0
-100 11,630 (0.4)
-200 11,603 (0.6)
Another tool used to measure interest rate sensitivity is the cumulative
gap analysis. The cumulative gap represents the net position of assets and
liabilities subject to repricing in specified time periods. Deposit accounts
without specified maturity dates, are modeled based on historical run-off
characteristics of these products in periods of rising rates. As of June 30,
2000 the subsidiary Bank was in a liability sensitive position which means
that more liabilities are scheduled to mature or reprice within the next year
than assets. The cumulative interest rate sensitivity gap as of June 30, 2000
was 7.69% 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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